Life insurance policies are not all the same - and for good reason. The fact is, everyone has different needs and objectives. Having a choice from the many different types of life insurance allows you the freedom to select the policy that's right for you. But with so many to choose from, how do you know what type of life insurance policy to buy?
Once you've determined how much coverage you need, how long you need it, and how much you can comfortably afford to pay, then it's time to learn about what types of life insurance policies are available to you. For some people, a single policy may be sufficient, while others may need a combination of policies. As part of Protective Life's ongoing commitment to life insurance education, we've put together a guide that explains the various types of life insurance to help you make an informed decision when shopping for coverage.
The difference between term and permanent life insurance
Life insurance policies are grouped into two main types of life insurance - term and permanent. Within these two main groups are different variations of term and *permanent life insurance coverage that you can select from. As a consumer, your first decision regarding a policy would be whether you would prefer to have coverage for a limited time, or for the rest of your life. Already feeling a bit confused? Don't worry! We're going to explain the difference between term and permanent life insurance.
When you rent a home or apartment, you'll often enter into a lease agreement that will allow you to live under that roof for a certain length of time. As long as you make your monthly rent payments, you can feel secure knowing that you'll have a place to live. Term life insurance is often considered a type of temporary policy because it is designed to cover you only for a specific “term” or period of time.
In contrast, a permanent life insurance policy is just that - permanent. Instead of a temporary benefit like renting a home, a permanent life insurance policy is more akin to buying a house. As long as you continue to make your required premium payments on time, a permanent life insurance policy will remain in effect your whole life and won't expire.Now that you understand the two basic policy types, let's look at each of them in more detail beginning with term life.
Term life insuranceTerm life may be more affordable compared to a permanent type of life insurance, allowing you to buy a lot of coverage for less money. However, as mentioned above, you'll only have your term policy for a selected period of time. Depending on the policy term you select, that could be anywhere from five, 10, 15, 20, 25, and even 30 years. How do you know if term is right for you? By considering how a temporary life insurance policy could provide you with the benefits that you may need today, as well as in the future.
Types of term life insurance
Level and decreasing termTerm life falls under two basic categories - level term and decreasing term. With level term, the death benefit remains the same for the entire term of the policy - no matter when you die during the policy's term. However, the death benefit for a decreasing term policy will gradually decrease over the life of the term. People often use a decreasing term policy to cover a specific debt in the event of their premature death, in hopes that by the time the debt is paid down they will no longer need life insurance coverage.
Renewable term lifeSome level term life policies are renewable. When the term is up, you could have the option of renewing the policy for an additional term, typically up to a certain age. However, the new premium will reflect your attained age and current health.
Convertible term lifeSome term life policies come with a conversion option. This allows you to convert some or all of your term policy to a permanent policy without having to prove your insurability.
Permanent life insurancePermanent life insurance differs from term in that as long as you make your required premium payments on time, the policy will never expire. With this type of policy, you get a level death benefit with the added potential to build cash value over time. Because of these main benefits, premiums for this type of life insurance policy are typically higher than with term life. However, the fact that you'll never have to reapply for coverage based on age or health can make a permanent policy more cost effective compared to renewable term life.
Types of permanent life insurance
When people talk about permanent life insurance, they typically think of whole life. Whole life insurance offers:
- A level death benefit
- A level premium
- Life insurance protection that lasts your whole life (as long as required premiums are timely paid)
- Tax-deferred growth on any cash value accumulation
- The potential to earn cash value over time and offering “living” benefits that you can borrow against via a policy loan and used for future expenses such as a down payment on a home or help funding a college education*
There are a number of different types of permanent life insurance policies that offer just as many (if not more) long-term benefits than whole life. Let's take a look at some of these other types of permanent life insurance.
Like whole life, universal life (UL) is a permanent life insurance policy. However, universal life offers more flexibility than whole life insurance, allowing you greater control over several important policy components. Universal life offers:
- The ability to set the guaranteed number of years you want the policy to be in force (or even for your entire lifetime).
- Flexible options regarding the amount and timing of premium payments, as well as the amount of coverage (increases subject to additional underwriting).
- Protection for your entire life (provided premium payments are timely made to keep the policy in force).
- The potential to build cash value in a tax-deferred way that may help you with long-term financial goals.
- The ability to take out policy loans according to your contract.
- The flexibility to adjust your planned premium.
Indexed universal life
Indexed universal life (IUL) provides the long-term security of a permanent life insurance policy, along with the potential to earn cash value over time. What makes the IUL different is the way interest can be credited to your policy. In addition to the traditional declared interest rate, an IUL offers the opportunity to earn interest that is linked to the performance of a market index, subject to caps and floors. When that market index performs well, your cash value has the potential to grow as a result. In contrast, if the index doesn't do well, your cash value may accumulate at a slower rate or not at all. An IUL policy offers:
- Tax-deferred growth on any cash accumulation.
- The flexibility to adjust your planned premium.
- The flexibility to adjust your death benefit as needed (increases subject to additional underwriting).
Variable universal life
Like a UL and IUL, a Variable Universal Life (VUL) policy gives you the ability to adjust your premiums and death benefit. However, with a VUL, you can structure how you want any cash value in your policy to be directed. This could be into a mix of portfolios investing in stocks, bonds, and money market funds. You can structure your chosen mix to better meet certain personal or business objectives. Agents are required to have a securities license to sell these types of products. A VUL offers:
- The potential for quicker growth (but with more risk).
- Tax-deferred growth on any cash accumulation.
- Option to adjust your death benefit.
Survivorship universal life
Often called second-to-die or joint survivorship insurance, survivorship universal life (SUL) delays the death benefit until the passing of the last (second) surviving partner, at which time the full benefit is paid. A SUL insurance policy may be used if you're married or part of a couple and have estate planning needs such as helping beneficiaries pay estate taxes, protecting a loved one with special needs, providing a business continuation strategy, or leaving a legacy. A SUL offers:
- Often, a more affordable option than purchasing two individual permanent policies.
- A flexible death benefit and premiums.
- Death benefit typically passes to beneficiaries' income tax free.
Joint first to die life
A joint first to die policy is designed to cover the lives of two people (typically a couple) with the death benefit being paid out upon the death of the first person. Simply stated, you'll be sharing one policy between you and your spouse/partner that will pay benefits to the surviving spouse/partner. These types of policies can be written as whole life or universal life. A joint first to die policy offers:
- Often, more affordable coverage compared to purchasing two individual life insurance policies.
- An alternative option for replacing the lost income of a deceased spouse.
- The ability for partners in a business to buy out the other's interest upon his/her passing.
Supplemental life insurance
Supplemental life insurance products can be a good way to enhance your overall coverage needs. They are sometimes offered through the workplace as part of a company's employer-sponsored benefits, or individually from an agent or insurance company. The following are a few of the more common types of supplemental coverages.
This type of life insurance may be taken out when you finance a large purchase such as a car, boat, recreational vehicle, etc. Upon your death, credit life insurance pays off some or all of your loan, transferring titles free and clear to your estate and ultimately to your beneficiaries. Credit life insurance is often offered through banks, credit unions, and auto dealerships, as well as some life insurance companies.
Accidental death and dismemberment
Technically a life insurance policy rider, an AD&D policy pays your beneficiary a death benefit in the event you die in an accident rather than natural causes. Sometimes referred to as double indemnity riders/policies, the payout may be double the face amount of the death benefit. The dismemberment payout is when there is a loss of certain body parts, hearing, and eyesight, as outlined in your policy. AD&D can be offered as a policy rider, a standalone policy, or as part of a group plan.
Group Life is a type of life insurance coverage that is commonly provided as part of an employee benefit package through your workplace. The employer determines the amount of coverage, which is often a multiple of your salary (typically two times your annual wages). Because these policies are often paid for all or in part by your employer, if you were to get laid off or leave your current position, your policy could end as most employer-sponsored group life plans are generally not portable.
Voluntary life insurance
Like group life insurance, voluntary life is typically a part of an employer's benefits package. However, unlike group insurance, voluntary life insurance may be owned individually and allows you to select an amount of insurance coverage you want. Voluntary insurance may be whole life, term, or universal life.
Burial life insurance
Often referred to as final expense or funeral insurance, burial life insurance is a small life insurance policy that is designed to cover funeral and burial costs such as a plot, casket, burial or cremation services, etc. when you die. This is a good option if you can't afford a larger premium but need to preplan for your final expenses. Burial insurance is generally easy to apply for and some insurance companies do not require a medical exam. For this reason, it can be a good fit for older people or someone with health concerns that may prevent them from securing a more traditional life insurance policy. Premiums remain level and provide permanent coverage as long as required premiums are paid. In some cases the burial insurance policy can be purchased directly from a funeral home as part of estate planning, and the policyholder can name the funeral home as the beneficiary.
This guide is meant to be a helpful resource for gaining a better understanding of the various types of life insurance policies that are available on the market today. Once you've narrowed down your choices, discuss them with an agent or life insurance company representative who can provide you with more in-depth information, answer any questions that you may have, and provide you with quotes.
Remember, life insurance is meant to protect the people who depend on you for financial support after you die. Take the necessary time to learn as much as you can about the policy that you are considering, as well as the company you're buying it from.
*As long as required premium payments are timely made.
**Access to cash value through borrowing or partial surrenders will reduce the policy's cash value and death benefit, increase the chance the policy will lapse, and may result in a tax liability if the policy terminates before the death of the insured. Investors should carefully consider the investment objectives, risks, charges, and expenses of a variable universal life insurance policy and its underlying investment options before investing. This and other information is contained in the prospectus for a variable universal life insurance policy and its underlying investment options. Investors should read the prospectus carefully before investing. Prospectuses may be obtained by contacting PLICO at (800) 265-1545.