Feeling overwhelmed about life insurance? That’s understandable. It’s an emotional topic with lots to consider.
How can you navigate this complex world and get the coverage you need without losing sleep?
Learning more about the different types of life insurance policies is a great place to start.
In general, there are three main types of life insurance policies: term life, whole life, and universal life.
- Term life is a policy that covers you for a set period of time, typically 10, 15, 20, or 30 years. Once the policy expires, so does the coverage.
- Whole life policies provide permanent coverage that lasts a lifetime as well as guaranteed premiums and a guaranteed cash value.
- Universal life insurance also provides permanent coverage and a cash value, as well as more flexibility in premiums, death benefits, and investing.
We didn’t include accidental death insurance in this article because for most folks, this type of insurance is best used in addition to another type of life insurance policy. In fact, many insurers offer accidental death riders (add-ons).
Which is right for you? The best life insurance for you depends on your goals, needs, and budget. Perhaps your ideal portfolio would include several types of life insurance.
And of course, there’s one choice that could affect your costs and coverage in big ways: should you get a no exam (simplified issue) policy, or a fully underwritten one?
We’ll break down these complex options by going over the pros and cons of each and who they might be right for. But if you already know what type of policy you want, read about the best life insurance companies instead.
Do I need a medical exam?
Before we dive into other types of life insurance, let’s answer the question that’s top of mind for many people: will you have to take a medical exam to get coverage?
The answer: maybe.
In fact, you may want to take an exam because it could save you money and get you better coverage. Let us explain.
Fully underwritten life insurance
Life insurance is an agreement between the policy owner and the insurance company. In exchange for paying premiums, the insurer agrees to take on the financial risk of your death, up to the agreed-upon death benefit.
So how much does it cost to lift that risk off your shoulders and place it onto the insurer? That depends on factors such as the insured person’s age, lifestyle, and health.
To fully underwrite a policy and arrive at a price for coverage, insurers need to measure each of these factors. (Check out our life insurance rates by age article to see the sorts of prices they come up with). Measuring health in a fully underwritten policy typically means submitting to a medical exam.
The insurer usually pays for this exam, which a technician can conduct at your home or office at your convenience. The technician may draw blood, take a urine sample, ask medical questions, and more.
Unfortunately, scheduling an appointment and reviewing test results can lengthen the application process to one or more weeks. You won’t be insured in the meantime, and many folks are too busy to schedule an exam right away.
And let’s face it: a medical exam doesn’t sound like a great way to spend an afternoon, does it?
So why in the world would you want to take a medical exam? Because if you’re in good health, insurers are more likely to give you a better rate. See for yourself by checking out our life insurance quotes page.
Having more information about your health allows an underwriter to feel more confident in estimating their risk level. When insurers can underwrite with confidence, they don’t have to add as large a margin of error into rates.
Unfortunately, if you have preexisting medical conditions, an exam could result in a higher rate than if you chose a no exam policy instead.
No medical exam life insurance
No exam policies, also known as simplified life, usually cost more than exam required policies. Still, there are several reasons someone might choose the former. The application process is typically much shorter (sometimes just minutes long), and you may be able to complete it online.
Additionally, people with health issues may especially benefit from a no medical exam policy.
To keep rates low for healthy folks, many insurers hesitate to cover people with significant health challenges. Insurers that do cover these folks usually do so at much higher prices.
No medical exam life insurance can be a real boon for those who’ve been turned down for fully underwritten policies in the past. Unfortunately, not all companies offer life insurance without a medical exam. Those that do may offer it only for term life.
Luckily, we’ve put together of the best no exam life insurance companies to help you find a great insurer and avoid getting stuck with a needle.
Term life insurance
Term Life Insurance policies typically provide the most bang for your buck.
While it’s not always the case, we find term insurance gives most people exactly what they need: a substantial death benefit later without making you turn your pockets out today.
Of course, your needs are unique to you. Talk to one of our licensed sales agents to find out if term life will help you accomplish your goals.
Speak to a Licensed Agent 888-234-8376
So what is term life insurance? In a nutshell, it’s a straightforward insurance policy with typically low premium payments for coverage that ends after a certain period.
Most folks choose 10-, 15-, 20-, 25-, or 30-year terms because that lines up with when their youngest leaves the nest or the final mortgage payment leaves their bank account.
Choosing the right term could help you avoid leaving loved ones with a pile of bills when you’re gone—without adding much to that stack in the meantime.
In short, term life allows people to protect loved ones during higher-risk periods, such as child-rearing years or while they build up savings to cover final expenses. And the best part? Many people can get this coverage for the cost of eating out once a month.
Because term life coverage ends after a certain period, however, most people outlive their insurance. In fact, some experts say the number of term life policies that ever pay out is just 1%–5%.1 Unless you purchase a Return of Premium (ROP) rider (more on that later), you don’t get those premiums back.
As a result, some folks see term life as wasteful and opt for permanent life insurance with a cash value instead.
- Cheapest policies available
- Simple and straightforward to buy
- No exam policies available
- No investment opportunity or cash value
- Terms that may end before your need does
- No return of premiums without a rider
Who should get term life insurance
The budget-conscious consumer
There’s a saying in the life insurance industry: the best policy is the one you can afford. Getting a policy with life-long protection or added investment opportunities may be right for some folks, but too expensive for others. If it’s term or nothing, term insurance is a logical choice.
Starting a family can be a big financial responsibility. Whether you’re a breadwinner or a stay-at-home parent, your contributions to your household will be sorely missed if you die.
Life insurance can’t replace you as a parent, but it can replace some of your financial contributions. Many parents choose a term life policy that covers their family until the youngest child gets through college.
Owning a home is the most significant financial risk most folks ever take. To ensure loved ones can still pay the mortgage if the unthinkable happens, homeowners may take out a term life policy for the length of their loan.
While there are policies designed to pay only a home loan, called mortgage insurance, a regular term policy may be a better choice. Term policies allow a loved one to spend the death benefit on other things too, like final expenses and medical bills.
Many folks have few financial risks by the time they retire. They’ve built up savings their spouses could live on, paid off their homes, and finished raising their children. Passing away at that time would be less financially painful, so many retirees choose low death benefit term life final expense insurance.
Life insurance can be more expensive and harder to get at higher ages, but some providers offer life insurance designed for mature adults.
Types of term life insurance
The most common term lengths are 10, 20, and 30 years, but many insurers also offer 15-, 25-, and 35-year terms. Some even provide one- or five-year terms.
Term life may also come in the form of level term, annual renewable term, or decreasing benefit term.
This type of policy has the same cost or benefit throughout the entire length of the coverage, no matter which policy you choose.
If you’re considering level term life, make sure you understand what part of the policy is level.
- Level premium term life has the same premiums for the length of the term.
- Level death benefit term life has the same death benefit for the length of the term
Some policies have level premiums and a level death benefit.
Non-level policies may seem like a better deal (a higher payout for lower premiums), but their overall value decreases over time.
Level term is just the opposite: insurers may ask you to cover more of the policy’s cost up front, but you’ll get a steady value over time.
Annual renewable term
Annual renewable term (ART) life insurance is a type of non-level life insurance. Terms last just one year, but you can renew the policy each year. Unfortunately, rates increase as you age.
Decreasing benefit term
This non-level term life insurance has a death benefit that decreases over time. While your premiums stay the same, they will buy progressively less coverage.
One common type of decreasing benefit term life insurance is mortgage insurance, which has a payout matching your debt, which decreases as you pay off your home loan.
Return of premium rider
If you want to avoid the scenario of outliving your term life policy and having nothing to show for your investment, consider adding a return of premium rider. Typically, this rider allows you to recoup some of your premiums at the end of your term. How much depends on the insurer.
ROPs increase your premiums. Ask your insurance agent how much you’ll get back at term’s end and decide if it’s worth the increase.
Even more important than an ROP is the option to convert your term policy into a permanent one when your term is up.
Most people still need some life insurance (although probably less, if they’ve planned well) when their term is up.
The problem is, after a 20- or 30-year term, they’re older and likely have more health issues. Many folks finish up their term and struggle to get acceptance into another policy, even with the same insurer.
A conversion rider protects against getting stuck without coverage at the end of your term by allowing you to convert the policy to whole life.
Your rate will likely increase because whole life is more expensive than term. Plus, your new price will be based on your current age.
What the new rate won’t consider, however, is any new health issues you’ve gained since you first applied. If you got in the door with a “preferred class” rating, you get to keep it when you convert your policy.
Bottom line: Simple, low-cost life insurance
Straightforward and cheap, term life is also the most popular type of life insurance. It’s an excellent choice for folks who want coverage during their most financially risky years.
Whole life insurance
Whole life insurance is well named: it’s designed to cover you for your entire life instead of ending after a number of years like term life does. As such, whole life can cost more and be more complicated than term life.
Many folks treat their whole life policy as an investment.
As a type of permanent life insurance policy, whole life builds cash value that grows as you pay your premiums.
Many folks want to know which is better: term life vs. whole. Term life is straightforward, life insurance designed to cover a temporary need. Whole life is designed to cover you for life while simultaneously providing a small return in the form of cash value.
Whole life premiums are usually much higher than even the most extended term life policies for the same death benefit.
In part, the higher price tag is because you’re locking in the same rate for life. The possibility of death increases as you age, especially as you approach and hopefully surpass average life expectancy.
A policy’s cash value is another reason whole life insurance is more expensive than term life. A portion of your premium goes into a separate account as your cash value.
The cash value portion of your policy is yours to keep if you cancel the policy (you’ll be taxed on any value above the total paid). Or you can take out a policy loan against your cash value.
Of course, rates vary by company, so check out our top ten list of whole life insurance companies to compare insurers.
- Lifetime coverage, provided you pay your premiums
- Premiums that are typically locked in for life
- Cash value and investment components
- Higher premiums than term life
- Complicated policy to get, drop, or change
- Fewer no exam policy options
Who should get whole life
This expensive form of life insurance offers benefits for passing on an inheritance to loved ones while avoiding high-income estate taxes. Whole life can be an essential part of estate planning or setting up a trust.
Folks who need a guarantee
If guaranteed coverage for life is more important than a substantial death benefit, investing in a low-benefit whole life policy could be a smart move. Buying a $50,000 policy early should cover your burial expenses for life, as well as increase its value in step with inflation.
Parents of children with special needs
Most folks’ financial risks drop significantly once their children move out. If your child (or another dependent) needs lifelong care, however, you may want lifelong coverage as well. Whole life is the most straightforward, lifelong alternative available.
Types of whole life
Level whole life
Like term life, most whole life policies are level premium (your premiums remain constant for life) and level benefit (the death benefit remains consistent over time).
Joint or survivor whole life
Typically for couples, joint whole life is a way to cover two or more people with a single policy. If either person dies, the surviving partner receives the death benefit.
Unfortunately, the surviving partner’s death won’t be covered, so joint policies may not be a great choice for couples who have children or other dependents.
Second-to-die whole life
Like joint life insurance, second-to-die policies cover two people under the same premium. The difference is the insurer pays the death benefit only if both people die.
That caveat makes this insurance a poor way to support your spouse if you die, but a great way to provide for children should both parents die.
Instead of a lump sum right away, this type of policy provides monthly income for your family for a certain period after you die.
Family income policies can be an excellent way to continue providing income to a household without your loved ones worrying about how to invest a large sum of money all at once.
Modified and graded whole life
Instead of having a level premium, modified and graded policies charge less at first, then increase premiums over time.
These policies may be a more natural way for folks just starting down a career path (and making less money) to afford whole life insurance.
Participating and vanishing premium whole life
Participating whole life policies pay a dividend (a percentage of the profit generated by your policy). Policyholders get these payments periodically while they’re still living.
A vanishing premium policy is a special kind of participating policy designed to produce dividends that eventually cover premiums entirely. Premiums will be higher initially than non-vanishing premium policies.
If you have enough cash to burn a hole in your pocket and want to avoid the commitment of paying monthly premiums, consider a single-premium policy. You plop down a single, substantial premium and get coverage for life.
If you choose whole life to avoid estate taxes, however, use caution. Some single-premium policies may be classified as Modified Endowment Contracts (MECs).
With an MEC, you might have to pay taxes on any pre-death income gains, and your beneficiaries may pay a 10% tax on any life insurance proceeds (death benefits) they receive.
Important riders for whole life
High early cash rider
If building cash value is important to you, consider making it a high early cash policy. These policies begin growing value more quickly using the dividends you earn. Bonus: they’re usually no more expensive than regular whole life policies.
Paid-up additions rider
A paid-up additions rider allows policyholders to use their cash value to buy additional coverage. Doing so increase your death benefits, but lower the portion of your policy that earns interest. Since you can do this without a medical exam, it can be a real boon for folks with health issues.
Bottom line: Lifelong coverage; cash value
Whole life is more than just life insurance; it’s an investment.
That said, whole life is more expensive and complicated than term life. Higher-income folks who don’t mind paying more for lifetime coverage and more bells and whistles tend to prefer it.
Even if that’s not you, it could be worth comparing whole life and term life insurance rates since most folks choose one of these types of policies.
Universal life insurance
Like whole life, universal life builds cash value. The main difference is universal policies typically provide more flexibility. You’ll pay more for this flexibility in the form of higher overall premiums and greater investment risk.
Depending on the type of universal life policy you pick, you may be able to adjust your premiums and death benefit as needed. You could decide how to invest your cash value, although that could be lousy news in an economic depression.
You could even get a policy that’s cheaper than whole life if you forgo a few investment perks.
While considered permanent life insurance, some universal policies don’t cover you for your entire life. Instead, they “mature” when you reach a certain age (commonly 95, 110, or 121) and pay out a lump sum, no death required.
Outlive a maturing universal life policy, and you’ll get both bragging rights and one heck of a birthday present.
If you want life insurance coverage that eventually pays for itself, you could pay large premiums up front and use your cash value to pay them later. This strategy could ensure you keep your policy into retirement when many folks see an income drop.
- Policies that build cash value over time
- A possible lump sum when your policy matures
- Flexible premiums and investments
- Higher premiums than term life
- No guaranteed interest rate when growing your cash value
- Coverage that may end at maturation
Who should get universal life
Wealthy estate planners
If your estate is worth $11.18 million or more (in 20182), an inheritance could be subject to a hefty estate tax. While most of us won’t have to worry, Uncle Sam could take a whopping 40% bite out of large inheritances.
Since death benefits are typically tax-free, many high earners invest part of their wealth in a universal life insurance policy to prevent their estate from being taxed away.
Some types of universal life insurance allow their owners to choose how to invest the cash value portion of the policy. If you have your pulse on the stock market, your policy could make a great addition to your investment portfolio.
Folks with permanent life insurance needs
Some folks don’t care much about investments, estate taxes, or cash values. They’d sleep easier if they knew their life insurance coverage wouldn’t end after a specific term.
The folks could choose a guaranteed universal policy (more on that in a moment) for less than whole life.
Types of universal life
There are three main kinds of universal life insurance, each with varying levels of flexibility, risk, and cost.
Guaranteed universal life (GUL)
With minimal cash value accumulation, this type of universal life doesn’t make a great investment. It’s typically the lowest-cost permanent life insurance, however, so it’s worth considering.
Variable universal life
The cash value and premiums of this policy type change depending on the market. In profitable years, this policy can be a great choice. Unfortunately, the market is cyclical, so you may end up struggling to pay premiums more than once in your lifetime.
If you’re considering this type of policy, we recommend pairing it with level-premium coverage so you’re not left unprotected if you need to cancel your VUL policy.
Indexed universal life (IUL)
The cash value growth of indexed universal life insurance will have both a minimum and maximum annual interest rate. That’s because its growth rate is tied to a performance index such as the S&P 500 or NASDAQ.
As a result, we like to think of indexed universal life as universal life insurance for the risk-averse.
Important riders for universal life
Waiver of cost rider
Like a waiver of premium rider on a term life policy, this addition pays your premiums if you become disabled.
You can use the rider to waive premiums for the remainder of your coverage, but only the portion that pays toward your death benefit. You’ll still be responsible for paying back any loans you’ve taken out against your cash value.
This rider is particularly essential if you have variable universal life. If your cash value dips with the market, you won’t be able to use that value as a buffer if you’re out of work and can’t afford your premiums anymore.
Bottom line: Permanent, but flexible
Universal may be the most complicated form of life insurance, but it’s also one of the most flexible. If you want adjustable coverage, premiums, and investments, universal life might be a logical choice.
Finding the right life insurance fit
Ask a dozen friends or family members for advice on choosing a life insurance policy, and you’ll likely get 12 different answers. But what’s worked for them may not be right for you.
Some folks will tell you term life is the way to go no matter what your situation. Others say term life is like throwing your money away if you outlive your policy. Get whole or universal life, they’ll say.
The truth is, the right policy (or policies) is unique to you, and you should be cautious when people who don’t understand your needs and goals offer advice. No matter how well-intentioned Uncle Fred’s “buy term life and invest the rest” recommendation may be, you’re not him.
You should always speak to a licensed sales agent before investing in a policy. Work with an independent agent who has plenty of experience to help you choose a policy that fits your unique needs.
The agents at TermLife2Go fit the bill. Whether you’ve decided on a policy already or need help pointing your life insurance compass, we’ve got you covered. Call us today.
Speak to a Licensed Agent 888-234-8376
Leave a Comment