What are the different types of life insurance?

1. Term Life Insurance

Term life insurance is the most simple kind of life insurance policy. It provides coverage for a specified period, typically 10, 20, or 30 years. The main benefit of a term life insurance policy is its affordability: premiums are lower to start than those paid for permanent insurance and, as such, it allows the owner to buy the most life insurance for the lowest cost for a limited amount of time.

How does Term Life Insurance Work?

When you purchase term life insurance, you pay premiums periodically over a specified term length. The death benefit is payable to your family or beneficiaries if you pass away during the policy term. However, if you outlive the life insurance term, unless you choose to continue your policy on a year-to-year basis at a significantly higher cost or convert your policy to a permanent policy (if offered by the company) your coverage will terminate and you will likely need to purchase a new life insurance policy at a higher rate, if your health permits.

Who Should Consider Term Life Insurance?

Term life insurance is ideal for:

• Young families just starting out who currently have lower income levels and need a higher death benefit.
• People who want to supplement a smaller amount of permanent life insurance coverage for a limited amount of time while their permanent policy’s benefit grows.
• Individuals seeking life insurance coverage for a singular purpose and a limited timeframe, such as to cover a mortgage or other loan, a business arrangement, or a divorce settlement.

2. Whole Life Insurance

Whole life insurance offers a guaranteed death benefit for no matter how long you live at a guaranteed locked-in rate. Additionally, the premiums you pay will go towards building cash value that can be withdrawn via policy loans on a tax-free basis to supplement retirement income, pay for college expenses, fund a long-term care insurance plan, and provide a guaranteed inheritance. However, whole life insurance requires higher initial premiums to offset the initial policy expenses.

How Does Whole Life Insurance Work?

Generally speaking, the best whole life insurance policies are with top-rated mutual companies that pay dividends to policy owners. A mutual company is one that is owned by its policyholders and so all company profits are returned to those policyholders in the form of dividend payments (this type of policy is specifically known as participating whole life insurance). These dividend payments are not correlated to the stock market or interest rates and have been paid out through the worst economic times including wars, depressions, and recessions. As the cash value grows, so does the death benefit amount, without additional underwriting or an increase in premium. Finally, unlike term life insurance, whole life insurance pays out no matter how long you live.

Who Should Consider Whole Life Insurance?

Whole life insurance is recommended for:

• People who want to guarantee a death benefit will be paid regardless of when they die.
• People who want to supplement their retirement income with tax-free income.
• Parents who want to plan a tax-free way to pay for children’s college expenses while still having the option to use the money for other purposes if their children don’t attend college.
• People who want to accumulate cash value with a low-risk asset that is not correlated to other market risks.
• People who want to lock in long-term care insurance where the premiums will not be lost if long-term care insurance is not needed

3. Universal Life Insurance

Universal life insurance offers the benefits of whole life insurance while providing flexibility in when you pay premiums and how much you pay. A universal life insurance policy can provide guaranteed lifelong financial protection along with cash value, or it can be used for limited coverage time at a lower premium amount.

How Does Universal Life Insurance Work?

Like whole life insurance, universal life insurance offers a set death benefit amount when the policy is initially purchased. But unlike participating whole life insurance, the cash value accumulates based on changing interest rates and costs of insurance and does not pay out dividends. It also does not require a fixed payment and allows for flexibility to pay more or less premium according to the policyowner’s life and financial circumstances. Life whole life insurance, though, the cash value can accumulate and be accessed for a variety of purposes tax-free.

Who Should Consider Universal Life Insurance?

Universal life insurance is suitable for:

• People who prefer lifelong life insurance coverage with flexible payment options.
• People who do not have the enough money for the higher initial premiums required by whole life insurance.
• People who have a desire to build up cash value to have access to later on in life.

4. Indexed Universal Life Insurance

Indexed universal life insurance is a type of universal life insurance, but it has become very popular in recent years and deserves its own explanation. It includes all the features of universal life insurance but bases its cash value accumulation on the performance of a stock market index, such as the S&P 500.

How Does Indexed Universal Life Insurance Work?

While an index universal life insurance policy bases its cash value accumulation on the performance of a stock market index, it does not actually invest any of your premium dollars in the market to determine the performance of your policy. In this way it allows for limited participation in market gains without any risk of market losses. An indexing feature enables the owner to select one or more indexes to be used to generate returns and these indexes can generally be changed by the policy owner on an annual basis.

Who Should Consider Indexed Universal Life Insurance?

Indexed universal life insurance is appropriate for people who:

• Want the benefits of universal life insurance with the possibility of greater cash value accumulation exceeding whole life insurance dividend returns.
• Want options to have some control over their life insurance investment returns.
• Want some of the benefits of stock market returns without being subject to the risk of stock market losses.

5. Final Expense Life Insurance

Final expense life insurance is a life insurance policy intended to do exactly what the name says, pay off a deceased’s medical expenses so those are not passed on to their loved ones. These expenses could include medical bills, funeral expenses, and burial costs when the policyholder dies.

How Does Final Expense Life Insurance Work?

A final expense life insurance policy is typically a type of a whole life insurance policy with a very minimal benefit that will payout whenever the insured dies. However, a defining feature of final expense life insurance is that it typically involves limited to no underwriting. This allows people who have health problems that would normally disqualify them for life insurance coverage to purchase a small policy to cover their final expenses. As a result, these policies generally have high premiums compared to the amount of coverage offered and without other benefits that other whole life insurance policies provide,

Who Should Consider Final Expense Life Insurance?

Final expense life insurance is an excellent choice for you if:

• You do not currently have life insurance and need to make end-of-life plans.
• You want to give your family peace of mind knowing that they won't have to worry about affording the cost of your final medical expenses and funeral.
• You have severe health conditions that would prohibit you from qualifying for other life insurance policy options.