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Home›Financial affairs›Types of life insurance – NerdWallet

Types of life insurance – NerdWallet

By Corey Owens
March 11, 2021
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What type of life insurance is right for you? It depends on a variety of factors, including how long the policy is valid, how much you want to pay, and whether you intend to use the policy as an investment vehicle.

Different types of life insurance

Common types of life insurance include:

  • Universal life insurance.

  • Simplified issue life insurance.

  • Guaranteed Issue Life Insurance.

All types of life insurance fall into two main categories:

  1. Term life insurance. These fonts last for a number of years and are suitable for most people. If you do not die within the time period specified in your policy, your policy will expire without payment.

  2. Permanent life insurance. These policies last a lifetime and usually include a cash value component, which you can withdraw or borrow during your lifetime.

Common types of life insurance policies

Simplified Issue Life Insurance

Guaranteed Issue Life Insurance

Term life insurance

How it works: Term life insurance is usually sold in lengths of one, five, 10, 15, 20, 25 or 30 years. Coverage amounts vary by policy, but can run into the millions. “Level premium” term life insurance charges the same price throughout the life of the policy. Term “renewable annually” is a one-year policy that renews annually. Annual policies can be useful if you have short-term debt or need coverage for a short period.

  • The inconvenients: If you survive your contract, your beneficiaries will not receive a payment.

Whole life insurance

How it works: Whole life insurance usually lasts until your death, as long as you pay the premiums. This is the closest thing to “make and forget” life insurance. Generally, your premiums stay the same, you get a guaranteed rate of return on the cash value of the policy, and the amount of the death benefit does not change.

  • Benefits: It covers you your whole life and creates cash value.

  • The inconvenients: It is generally more expensive than term life insurance or other permanent policies.

Universal life insurance

Guaranteed universal life insurance

How it works: The death benefit is guaranteed and your premiums will not change. There is usually little or no cash value in the policy, and insurers require payments on time. You can choose the age at which you want the death benefit to be guaranteed, for example 95 or 100 years.

  • Benefits: Because of its minimum cash value, it is less expensive than whole life insurance and other forms of universal life insurance.

  • The inconvenients: Missing a payment could mean you lose the policy. And since there is no cash value in the policy, you will walk away with nothing.

Indexed universal life insurance

How it works: Indexed universal life insurance links the cash value component of the policy to a stock index such as the S&P 500. Your earnings are determined by a formula, which is described in the policy.

  • Benefits: You can access the cash value, which increases over time. And you can see huge gains if the stock market performs well. Within certain limits, your payments and the amount of the death benefit are flexible.

  • The inconvenients: Due to investment caps, the cash value does not fully benefit from stock market gains. Additionally, these policies often represent more work than a term or lifetime product, as investments require monitoring.

Rate of participation : Policy will dictate how much your cash value “participates” in the earnings. For example, if your turnout is 80% and the S&P 500 goes up 10%, you get an 8% return. If the index goes down, you will not lose monetary value; you’ll just get zero rate of return. Some policies offer a low guaranteed interest rate if the market goes down.

Capping of earnings: Your cash value gains are subject to a cap. So if the index goes up 20% and your cap is 10%, you will only get a 10% return.

Death benefit and flexible premiums: Some policies allow you to adjust your death benefit as your family’s needs change. Within certain limits, you can also reduce your premiums or skip a payment, as long as your cash value covers costs. If you skip payments and don’t have enough cash value to cover costs, your policy could expire.

Variable and variable universal life insurance

How they work: The cash value in variable life insurance and variable universal life insurance is linked to investment accounts, such as bonds and mutual funds. Variable life insurance premiums are generally fixed and the death benefit is guaranteed regardless of the market situation. However, the variable premiums for universal life insurance are adjustable and the death benefit is not guaranteed. If you are considering a policy like this, a fee-only financial advisor – a planner who doesn’t earn commissions based on product sales – can help you choose the best one.

  • Benefits: There is the potential for huge gains if your investment choices go well. You can make partial withdrawals of the cash value or borrow against it.

  • The inconvenients: This requires you to be practical in managing your policy, as the cash value can change daily depending on the market. The fees and administrative costs are deducted from your payment before going towards the cash value.

Types of life insurance by purchase

The term “underwriting” refers to how a life insurance company calculates the risks to insure you. Therefore, the policy’s pricing determines how much you will pay. There are three main types of life insurance underwriting:

Fully underwritten life insurance

If you are in good health, fully underwritten policies will usually be the cheapest option.

This is because the application process usually includes a medical exam and questions about your health, as well as questions about your family’s medical history, hobbies and travel plans.

Insurers use this data to more accurately price the policy based on your specific life expectancy.

Simplified Issue Life Insurance

Streamlined issuance policies don’t require you to pass a medical exam. However, you may be asked a few health questions and may be declined based on your answers. Instant Approval Life Insurance Policies use quick online health questionnaires, along with algorithms and big data to speed up the application process.

Guaranteed Issue Life Insurance

Guaranteed Issue Life Insurance requires no medical exams and no health issues. In short, you cannot be denied coverage if you are in the qualifying age range, which is typically 40 to 85 years old. However, it is an expensive way to purchase life insurance and the amounts of coverage are generally low.

In addition, these policies have graduated death benefits, which means that if you die in the first few years after purchasing the policy, your beneficiaries may only receive a partial payment. People often buy this type of life insurance if they have been turned down elsewhere because of their health, but want to cover final expenses, such as funeral costs.

Other types of life insurance

  • Group life insurance is generally offered by employers as part of company benefits. Bonuses are based on the group as a whole, rather than on each individual. In general, employers provide basic coverage for free, with the option of purchasing supplementary life insurance if you need more coverage.

  • Mortgage life insurance covers your current mortgage balance and pays the lender, not your family, if you die.

  • Credit life insurance pays off the balance of a specific loan, such as a home equity loan. Your bank may offer to sell you credit life insurance when you take out a loan. If you die, it pays the lender, not your family.

    • First to die: Pay after the death of the first insured. The policy would then expire; he does not continue to cover the second person. These fonts are extremely rare because the demand is low.

    • Second to die: Pay after the death of the two insureds. These policies can be used to cover inheritance taxes or the custody of a dependent after the death of both policyholders.


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