The Different Types of Life Insurance Explained

The availability of a variety of life insurance policies calls for the need to learn what these types of policies are. Perhaps the most common two terms you’ll hear are term life and whole life insurance, so we’ll start with those. 

Term Life Insurance

Term life insurance expires after a certain period, and its simplicity makes it the most convenient policy. If you pass away before the expiration, then your specified beneficiary receives a death benefit. In this case, the premiums cover the death benefit that the insurer pays to the beneficiary in a lump sum, an annuity, or monthly payment. Although the individual rates vary, term life insurance happens to be affordable in comparison to the alternatives. 

Whole Life Insurance

Whole life insurance is a permanent policy that has no expiration date and comes with a death benefit and cash value. The death benefit acts as a tax-deferred savings plan whose interest increases per the fixed rate agreed upon in advance. Part of the premium will fund the cash value that grows as time goes by. The savings to expect will depend on the kind of policy you take. The period you pay the premiums will determine how long the whole life insurance will last. However, various complex determinants affect the cash value, therefore, rendering this type of life insurance less desirable.

Comparing term life insurance vs. whole life is one of the biggest parts of shopping for life insurance. However, the truth is that you don’t have to choose; many people purchase a combination of both term and whole life insurance policies. In this case, you could purchase a whole life insurance policy that serves as lifetime protection and a term policy that covers your family during the part of your life when you’re actively involved in a career and earning the most, and they depend on your income.

Universal Life Insurance (UL)

Universal life insurance is similar to a whole life policy since it features a death benefit and cash value. However, you don’t need a new insurance policy when looking to change the premium amount or death benefits. Also, you can divert the cash value to pay the premium, as long as you meet the minimum premium requirement. 

While this life insurance offers premium and death benefit flexibility, the changes may be complex for some individuals.

Indexed Universal Life Insurance

Indexed universal life insurance differs from universal life insurance in that you get a minimum guaranteed interest rate. This feature provides financial security since you are not at risk of losing your money. As the interest rate is neither fixed nor varied, the insurer bases the cash value on a specific index. 

Variable Life Insurance

Although similar to whole life insurance, the cash value of variable life insurance is undetermined. Instead of acting as a savings account, this life insurance functions as an investment strategy. However, as the premiums go to sub-accounts with features like mutual funds, your investment has no guarantee. Depending on the condition of the market, you might gain or lose your money. Also, the beneficiaries will get tax-free money from the insurer as long as the policyholder is alive. Once he’s dead, the insurance company retains all the money.

Variable Universal Life Insurance

Variable universal life insurance allows you to make changes to the premiums and death benefit value. You can also invest the cash value of the individual policy. However, this type of life insurance also comes with the risk of losing your investment money.

Final Expense Insurance 

Final expense insurance is different from other types of policies since it covers death-related spending. Some of the expenditures this policy might cover are funeral, burial, and medical fees. However, insurers only issue this policy to individuals of a certain age, and it typically only stays valid up to a specific age. This life insurance comes in two types of policies: guaranteed issue and simplified issue. Older people who have no other life insurance or savings to meet funeral costs can opt for final expense insurance. 

Before buying life insurance, consider what the individual policy covers to assess your benefits, risks, and hidden expenses. Analyze all the available options before settling on one to ensure you don’t miss out on the best alternative.