What Type of Life Insurance Do I Need?Updated July 13, 2022 Insurance
8 Types of Life Insurance in 2022
Many people who don’t have life insurance recognize that it’s probably something they should invest in to give their families financial security when they’re gone. While it’s often perceived as being too expensive, life insurance is actually more affordable than you may think. All you need to do is find the right type of life insurance that fits your lifestyle and provides the benefits your family will need.
Types of Life Insurance in 2022
- Term Life Insurance
- Permanent Life Insurance
- Whole Life Insurance
- Universal Life Insurance
- Variable Life Insurance
- Burial Insurance
- Survivorship Life Insurance
- VA Life Insurance
Each of these types of life insurance will help cover the costs of your death and may even provide a bit of extra financial support to your loved ones. The terms and payout vary for each type of life insurance, so be sure to carefully review any policy to determine how much it will cost you and if it will give your loved ones the help they will need after your passing.
What Is a Life Insurance Policy?
Before you purchase a life insurance policy, you must first understand what you are paying for and the benefits it can provide to you and your loved ones.
A life insurance policy is essentially a financial safety net and operates much in the same way that renter’s insurance or home insurance does. In exchange for premium payments, the insurance company provides certain benefits. In the case of home insurance, the insurance company distributes benefits in the case of theft, home damage, etc. With life insurance, you make regular premium payments to the insurance company that will distribute benefits to your beneficiaries upon your death. These benefits are a lump-sum payment upon your death. Beneficiaries can use these benefits for any purpose but benefits are often intended to help beneficiaries continue to maintain their lifestyle (pay mortgage, tuition, etc.) even after you have passed.
You can choose from a number of different kinds of life insurance. However, the type of payout, the amount of the premium payment, the validity of the policy, and those individuals that are eligible will all vary depending on the type of life insurance policy you choose.
8 Types of Life Insurance
Once you understand what life insurance is, the next question to answer is what types of life insurance should you choose?
Some types of life insurance only provide benefits within a certain window of time, while other types of insurance will provide benefits at any time. There are also types of life insurance that are available only for specific groups of individuals, such as military veterans. While term life policies and permanent life insurance are by far the most common types of life insurance, here’s a more comprehensive list of the different types of life insurance you can get for you and your family.
1. Term Life Insurance
Term life insurance is the most popular type of life insurance and is also the most affordable. With term life insurance you will get coverage for a certain period of time, with premium payments remaining the same throughout the policy’s duration. The term of the policy varies but typically ranges from 10-30 years.
If you pass during the term of your policy, your beneficiaries can claim the benefits from your policy without taxes. If the policy expires before your death, you’ll often have the option to renew on a yearly basis. Just note that each subsequent year after the term of your policy will have a higher premium.
2. Permanent Life Insurance
Permanent life insurance is the second most popular type of life insurance and has several differences from a term policy. For starters, it offers lifelong insurance and is not limited to a certain number of years.
Oftentimes a permanent life insurance policy will also build cash value. This cash component is accumulated on a tax-deferred basis and often serves as savings from which you can borrow or withdraw. Unlike with term policies where if you end the policy early you get zero benefits, with a permanent policy you can still get the policy’s cash value minus any surrender charges. However, it does take time to build the cash value (often many years), so you won’t have access to cash right away.
Note that permanent insurance is a specific category of life insurance. What this means is that while you can get a permanent life insurance policy, there are several varieties of permanent life insurance policies available such as whole life insurance, universal life insurance, burial insurance, and survivorship life insurance.
3. Whole Life Insurance
A whole life insurance policy is a variety of permanent life insurance that lasts an entire lifetime (as long as premiums continue to be paid). With a whole life insurance policy, you have a set premium that remains constant throughout the duration of the policy. Like other permanent life insurance policies, it also has a cash value component. With each payment you make on your policy, part of it will go towards your premium with the other part going into the cash account that grows at a fixed rate.
Given the longevity of the policy, whole life insurance will have a higher premium than a term life policy. However, cash value life insurance can provide financial flexibility when needed assuming you’ve built up enough value). This inherently makes a whole life insurance policy a bit more complicated than a term policy, but it is still a relatively straightforward type of permanent life insurance.
Opting for whole life insurance can be beneficial if you have dependents that require long term care, such as a child with a disability.
4. Universal Life Insurance
Universal is another type of permanent life insurance that adds a bit more flexibility than a traditional whole life policy. With a universal life insurance policy, your beneficiaries will have a guaranteed death benefit payout. However, over the length of the policy, there is flexibility in adjusting your premium payments and benefits.
It’s important to understand that there are different types of universal life insurance. Guaranteed universal life insurance policies have the lowest risk. Variable universal life insurance policies are also available, but they are riskier since they are tied to the financial market. You can also get an indexed universal life insurance policy that is tied to specific indexes like the S&P 500 rather than individual stocks and bonds. The risk of an indexed universal life policy sits between a guaranteed universal life policy and a variable universal life policy. The benefit of taking the risk with an indexed or variable universal life policy could help you build the cash value of your policy faster. But, it could also result in your policy being worth less than expected (all depending on the condition of the markets).
Note that if you make a withdrawal or a loan against the cash value of your policy and you pass, the amount will be taken from the death benefits.
5. Variable Life Insurance
Unlike other types of life insurance on this list, variable life insurance is tied directly to investment accounts such as mutual funds and bonds. Like whole life insurance policies, you’ll have a fixed premium that you pay and you’ll be guaranteed benefit payout to beneficiaries when you pass, no matter the condition of the financial markets.
The benefit of variable life insurance policies is that there is potential for significant growth in the cash value of the account, depending on how the market fares. Like other accounts with a cash value component, you can make withdrawals or borrow against the cash value of your account.
It is essential to remember that with this type of policy, the cash value of your account is entirely dependent on the performance of the mutual funds and bonds linked to your policy. Likewise, the administrative fees are deducted from the cash value of your account. Understanding the true value of your account requires more of a hands-on approach than other types of life insurance available.
6. Burial Insurance
No one wants to leave their families with expensive funeral bills. Even if you don’t want to spend the money on the premiums needed for life insurance, consider getting burial insurance. A burial insurance policy is a lighter version of a whole-life policy. The payout is minimal, often ranging between $5,000 to $25,000, just enough to cover your final expenses.
Generally, you are not required to undergo a medical exam to get burial insurance, but you may be asked a few questions about your health. But, these don’t factor into your premium rate as these are typically based on just age and gender.
It’s important to note that while the payout on these policies is nominal compared to other policy options, the fact is that it is a guaranteed policy and it is considered relatively expensive. A burial insurance policy is often taken out by seniors that have little savings for their family to use to cover their funeral expenses.
While it is easy to get burial insurance, policies typically have a graded death benefit, where recipients only get a refund of premiums paid if you pass within a specific time window after taking out the policy.
7. Survivorship Life Insurance
Survivorship life insurance is unique in that it provides coverage to two individuals with a single policy, typically a married couple. The benefits of this type of life insurance plan are paid out once both people on the policy pass away.
The benefit of getting survivorship life insurance rather than two individual policies is that you can often secure a larger payout for a lower premium. A survivorship life insurance policy can also be used as a financial tool to lessen the tax burden on your estate.
Note that this policy is called by numerous names including second-to-die life insurance or joint life insurance.
8. VA Life Insurance
In addition to VA loans and disability benefits, the VA offers a variety of life insurance options for United States veterans, service members, and their families. Term policies are available specifically while you are on active duty through Servicemembers’ Group Life Insurance. You can also add coverage for your family through a separate type of insurance known as Family Servicemembers’ Group Life Insurance.
Once you transition to civilian life, there are other permanent life insurance policies available to you through Veterans’ Group Life Insurance. If you are disabled due to an injury or illness caused by or aggravated by your service, you also have the option to take supplemental life insurance through Service-Disabled Veterans Life Insurance.
Policies for active duty, veterans, and their families have their own list of qualifying criteria in terms of length of service, type of discharge, etc. Discuss your options and eligibility with your local VA to find which life insurance option is right for your situation.
How Much Does Life Insurance Cost?
Many individuals recognize that they need life insurance but aren’t sure if they can afford it. The cost of life insurance is determined by the details of your specific policy, coverage amount, health, age, family history, and lifestyle choices.
The cost of a life insurance policy is also influenced by the underwriting of your policy. Underwriting is essentially how the insurance company calculates the level of risk they are undertaking to insure you. Most life insurance companies will offer a few different types of underwriting, offering fully underwritten policies, simplified issue policies, and guaranteed issue policies.
- Fully Underwritten Policy - This is often the cheapest option if you are a healthy adult. To get a more accurate idea of your life expectancy, and therefore the risk of insuring you, many life insurance companies require a medical exam and questionnaire about your health, family history, hobbies, etc. The healthier you are, the more favorable your premium rate will be.
- Simplified Issue Policy - These types of life insurance policies are a bit more costly, but often do not require a medical exam. Instead, they focus solely on the health questionnaire, relying on statistics and algorithms to determine the risk of insuring you. This means you could be denied a policy solely based on your answers to this questionnaire or given a higher premium rate.
- Guaranteed Issue Policy - One of the easiest life insurance policies to get, a guaranteed issue policy does not require any kind of medical exam or health questionnaire. With this type of policy, you will not be denied coverage as long as you are within the eligible age range (usually 40-85). This makes it an ideal solution for those that have been denied coverage by other companies. However, this convenience comes at a price, with guaranteed issue policies being some of the most expensive and with lower coverage available. Many times, these policies will offer graded death benefits, with beneficiaries only receiving partial payouts if you pass within the specific window of time after taking the policy.
On average, a healthy adult in their mid-30s without risky hobbies will pay around between $26-$30 per month for a $500,000 term policy. The older you get and your health declines, the higher your monthly premiums will be, so it’s important to get your policy earlier. Keep in mind that the longer your policy is, the higher your premiums will be – such as with a permanent life insurance policy.
Also, note that life insurance for females tends to cost less, due to their longer life expectancy. This cost difference between the sexes increases with age, so getting a policy early is beneficial to lock in lower rates.
Before deciding on which policy to take, be sure to understand the full cost of the policy, since you’ll likely be making premium payments for decades. Letting a policy lapse because of costs will cause you to lose all of your benefits, meaning all the premium payments you have made will be for nothing.
Which Type of Life Insurance Do I Need?
You’ve found the best homeowners insurance and make sure to keep your car well-insured, so why not cover all of your bases by making sure you get the right type of life insurance for your family?
If you have a tight budget, you may want to give serious consideration to a term life insurance policy as they tend to have lower premiums. Depending on your agent, you may also be able to convert your term policy to a permanent life policy down the line without having to re-apply.
However, if you foresee that you may need a cash infusion from time to time in the future, a permanent life policy that maintains a cash value may be a better option for you. Just be mindful about the type of risk you take on when you opt for a variable life insurance, variable universal life insurance, or indexed universal life insurance policy.
Each of the types of life insurance discussed above has benefits and disadvantages. It’s completely normal for your life insurance needs to change as life circumstances change. So when choosing the best life insurance company, be sure to consider both your current circumstances as well as your long-term goals as well.
As with any financial decision, be sure to take your time through the decision-making process. Read the policy from your life insurance company thoroughly to understand what you are signing up for and feel free to ask questions until you feel comfortable making a final decision.