13 Sep Types of Life Insurance Explained
The world has changed quite a bit since the first life insurance policy was issued in 1706, which explains why there are several types of life insurance available today.
When the Amicable Society for a Perpetual Assurance Office first began issuing life insurance, it worked to provide the family of deceased society members who contributed monthly premiums a payment at the end of the year. The amount was determined by how much the deceased member contributed.
What started in 1706 has grown into a huge industry with 837 companies selling life insurance in the United States and multiple types of life insurance to choose from.
At Stop Being Sold, we make it our goal to teach consumers the importance of understanding their choices when it comes to financial products – and that includes the different types of life insurance available.
Life insurance is one of the most important purchases you can make.
That’s why it is not surprising to discover that 52% of Americans have purchased life insurance.
Yet, according to recent data, 50% of Americans are currently underinsured.
Unfortunately, some insurance sellers take advantage of the important nature of life insurance just to get people to buy a type they don’t need, which means they wind up with inadequate coverage.
Or purchasing a policy that isn’t the right fit.
As we explain in our Ultimate Life Insurance Buyers’ Guide, life insurance isn’t a one-size-fits-all product that should be sold to you.
Rather, because everyone’s needs are different, the type and the amount of life insurance that you should obtain – or whether you should even have life insurance coverage at all – will depend on a variety of factors that are specific to you.
Don’t fall victim to life insurance sellers who just want to sell you a policy.
Keep reading to learn about the types of life insurance so you can make the best possible choice for your family.
What Is Life Insurance?
Let’s start at the very beginning. What is life insurance? And what is its purpose?
Investopedia explains, “Life insurance is a contract between an insurer and a policy owner. A life insurance policy guarantees the insurer pays a sum of money to named beneficiaries when the insured dies in exchange for the premiums paid by the policyholder during their lifetime.”
Essentially, when you purchase life insurance, you either pay for it up front, or you pay monthly or annual premiums over time.
The ultimate goal of life insurance is to protect the people you love and care about from suffering financial hardship as a result of your death.
Who Needs Life Insurance?
If your death will financially impact or burden your family, then you need life insurance.
Here are some factors that will help you determine the type of life insurance that is the best fit for your needs:
- Your marital status.
- Whether or not you have children or dependents.
- Whether your pension or income source will continue for your spouse when you die.
- If you expect to owe estate taxes.
- If you have large debt obligations, such as mortgages, credit card debt, or personal loans.
- If you own a business where a partner or joint owner could purchase your share of the business upon your death.
- Whether your loved ones would suffer a drastic reduction in their lifestyle upon your passing without some type of additional financial support.
Types of Life Insurance
Selling life insurance is big business.
According to the American Council of Life Insurers, “In 2019, companies issued $12,388,298 million worth of individual life insurance policies.”
And sales people are clamoring for their take.
IBIS World reports, “There are 1,071,272 insurance brokers, agents, and employees in the United States in 2021.”
The large number of life insurance brokers is part of the problem.
Insurance agents often push a certain type of life insurance on their clients rather than finding the life insurance that best meets their clients’ needs.
Again, life insurance should be designed to fit the individual and not as a one-size-fits-all financial product.
Use this glossary of types of life insurance to make informed and empowered decisions.
Term Life Insurance
As the name suggests, term life insurance is only designated for a certain time or number of years before it ends, such as 10, 20, or 30 years.
If you die within the term, a set amount of money will go to your designated beneficiary.
Term life insurance tends to be the most affordable and simplest life insurance policy.
According to Policy Genius, “The average monthly premium payment for a 20-year, $500,000 policy for a healthy 35-year-old female is $24.39.”
Whole Life Insurance
Whole life insurance, sometimes called permanent life insurance, covers death benefits up to whenever you die – or your whole life – as long as you pay the premiums.
What sets whole life insurance apart is that it offers cash value and works similarly to a savings account.
The cash value accrues interest over time and can be withdrawn and used as a loan.
In comparison to term life insurance, whole life insurance is significantly more expensive.
Universal Life Insurance
Universal life insurance is a type of permanent life insurance that offers a bit more flexibility than whole life insurance.
Like whole life insurance, universal life insurance offers cash value.
The key difference is that universal life insurance offers flexible premiums, meaning you can alter your premium payments according to your needs.
You can also adjust the death benefit amounts with a universal life insurance policy without having to obtain a new policy.
Indexed Universal Life Insurance
An indexed universal life insurance policy is a type of universal life insurance.
The main difference is that an indexed universal life insurance policy’s cash value is from an index, such as the S&P 500.
The cash value rate is determined by the insurer’s chosen index rather than a variable interest rate.
Similar to other permanent life insurance plans, the cash value of an indexed universal life insurance policy is accessible, and it accrues over time.
Since this policy’s cash value is determined by the stock market index, it can experience significant growth.
Variable Life Insurance
Variable life insurance combines death benefits with a savings account along with investment accounts.
The money that is used for cash value is placed within mutual-fund-like accounts that allow for significant growth.
However, there is also a risk that you may lose money.
With variable life insurance policies, the premiums are generally fixed, and the death benefit is guaranteed even if the cash value suffers from market lows.
Variable Universal Life Insurance
Variable universal life insurance is a combination of universal life insurance and variable life insurance.
In contrast to variable life insurance, variable universal life insurance plays the market.
If you choose a variable life insurance policy, this means your death benefits may experience not only the highs of the market but also the lows.
In other words, death benefit amounts are not guaranteed.
Like universal life insurance, you can adjust your premiums and alter your death benefit amounts.
Final Expense (Burial) Insurance
For those looking for a policy that will only cover funeral, burial costs, or medical care associated with your death, a final expense life insurance policy may be the right fit.
These policies tend to have higher premiums and lower payouts, so they really only work for people in the unique position of only needing funeral costs covered.
[Related Read: Is Burial Insurance Worth It?]
Group Life Insurance
Group life insurance is a type of employee benefit, sometimes offered at low or no cost by employers.
Group life insurance premiums are determined by the group rather than the individual.
It tends to provide low coverage, so many experts suggest accepting it if it is offered at low or no cost and combining it with personal life insurance.
Many of these policies allow you to convert to individual policies when you retire or change jobs — usually without medical underwriting.