The different types of life insurance. A simple guide.
Understanding the different types of life insurance is an intimidating task, that’s what you may think. But, once you discover that there are only two types of life insurance, it will make understanding each type much more clear.
This blog post to help you make sense of the two life insurance types and to help you choose which is best for you.
The two different types of life insurance
Life insurance can be broken down into two different types of policies.
- Temporary insurance (Term Insurance)
- Permanent insurance (Whole or Universal)
There are pros and cons to each type of policy which we will explain more below. Knowing the difference between each type of policy can help make sure you choose the best plan for your individual situation.
|Term (Temporary)||Whole (Permanent)||Universal (Permanent)|
|Builds cash value||No||Yes||Yes|
|Cash withdrawals allowed||No||Yes||Yes|
|Policy loans allowed||No||Yes||Yes|
Two types permanent insurance
There are two different types of permanent life insurance policies.
- Whole life
- Universal life
A permanent insurance policy is designed to last an individual’s entire life without lapsing. Most permanent policies also build up cash value within the policy that can be accessed by the insured by withdrawal or loan.
The difference between permanent policies is not the insurance coverage, but the way each plan manages the cash value.
Types of whole life insurance
Whole life insurance best for someone looking for permanent coverage, wants to build cash value and lock in guaranteed level premiums for the duration of the policy.
The type of whole life insurance you should choose will depend on your goals and as well as your current health. There are several types of whole life plans with much different underwriting guidelines. So let’s take a look.
|Death benefit allowed||No Limit||$3,000-$50,000||$3,000-$100,000|
|Builds cash value||Yes||Yes||Yes|
|Death Benefit||Day one||Graded Benefit||Day one|
|Policy loans allowed||Yes||Yes||Yes|
*Death benefit amount subject to age and carrier
Types of universal life insurance
Universal Life is very similar to whole life. There is a death benefit based on the coverage purchased. Like whole life, there is a cash value component. The difference is that Universal Life provides more options and flexibility than a whole life policy does.
Universal life offers flexible premium payments that allow an insured the ability to miss payments without lapsing the policy (provided there is adequate cash value).
The biggest difference between the types of universal life insurance is the way the cash value is credited interest in the policy.
The cash value can grow based on a set rate of return; or, can track an index and be tied to market conditions. One of the major differences in the types of Universal Life is the cash value and the vehicles used to grow your investment.
Types of term insurance
Term Insurance is the most affordable insurance type. It is pure insurance with no investment component. All that it provides is a death benefit. The other reason that term is more affordable than permanent insurance is there is an expiration date. You purchase coverage for a predetermined “term”. Terms usually range from 1-year, 10-year, 20-year and 30 year term increments.
Premiums for most term policy are also level, which means they will not increase annually but will remain stable throughout the duration of the policy term. At the end of the term, the policy will expire. However, there are some term policy which allows for the policy to renew from year to year after the original term has ended.
How to choose the best type
So which insurance type should you choose?
Permanent or Term?
Here are some questions to consider.
- Do you want permanent or temporary coverage?
- Are you on a tight budget? (Term is best)
- Do you care about building cash value? (Permanent is best)
- What do you need the insurance money to do if you die? (Pay off a mortgage, cover burial costs, etc.)
If you want the highest amount of coverage for the lowest premiums possible, term insurance is the way to go. You can stretch your insurance dollar much further and acquire large amounts of coverage.
If you are looking for creative investment strategies for retirement or debt elimination, such as your mortgage, permanent policies provide those options. You build wealth and protect your family and assets with protection.
How to get started?
- The first step is to compare quotes on our quote engine (it’s fast, accurate and free)
- Second is to compare quotes on several different products and coverage amounts with our quote engine
- Third consult with and Insurance Geek to go over your options and make sure you make the correct choice