Different Types of Life Insurance and What They are For

For someone who is not familiar with life insurance, it can seem daunting when first looking for a policy. Not to mention, everyone on the internet has their opinions about which plans are worth paying for and which ones are not. I want everyone reading this to understand the basics of each type of policy so you can already know what will work best for your family and your needs. Here I will discuss the primary policy types and what they are best suited for.

Term Life Insurance

Let’s just start with the most widely used, which is a term policy. The word term means it only lasts for a specific amount of time, anywhere from 10 to 30 years with most insurance companies. A term policy is the cheapest because it does not generate any cash value and because it is not permanent, meaning it does not last until age 120.

A term policy is best suited for a person that wants the cheapest premium with a substantial death benefit. Some term products offer over $1 million worth of coverage. For these reasons, a term policy is great for people looking for a mortgage protection plan. It will allow the beneficiary to pay the partial or full mortgage amount so that person is not at risk of losing the property. This is essential for a person who is the primary money maker in the family and the sole provider of income.

Term policies are for people aged 18-60 who want to pay a minimal amount for insurance. It is also great for businesses looking to insure their employees. Most group insurance plans that are offered by companies are term plans. At the end of the term, you can either renew your policy, convert it to a permanent policy, or let the policy expire.

Whole Life Insurance (WL)

Whole life is considered a permanent policy that lasts until age 110 to 121, depending on the insurance company. It is deemed permanent because it essentially lasts until you pass away, unlike a term plan. You never have to renew this policy type and your rate will stay the same unless something major happens. Whole life is great for people of all ages, from 0 to 85 years old, which is the max age with most carriers.

Whole life is primarily purchased for two main reasons: to cover final expenses or for cash value accumulation. Final expense insurance is just whole life insurance; the words final expense mean that a person purchases this policy to cover their final expenses upon their death. Every whole life plan accumulates cash value that can be used for personal use, no questions asked. However, it takes a substantial amount of time for it to accumulate. Just like when you invest in certain investing products, it is a long-term plan. You can either pay back what you loan yourself from your policy or it will be subtracted from your death benefit once you pass away.

Indexed Universal Life Insurance (IUL)

An IUL works like a whole life plan except that a portion of your premium payment goes towards a stock index, instead of receiving dividends from the insurance company. During the application process, you decide which stock index to use. It is also a permanent policy, so it lasts until age 120, if premiums are paid. The cash that accumulates can be used for any purpose the policy owner sees fit, such as for college, paying off debt, a down payment on a car or home, bills, and so on.

There are certain things that set an IUL apart from all other investment products. First off, you can never lose money in an IUL. You will never have to partake in losses if the stock market has a negative return. Every IUL has a floor rate (usually 0%) and most indexes have a cap rate, meaning you can only earn up to a certain percentage of returns. There are stock indexes with no cap rate also. Another factor about an IUL is under almost all situations, the money you receive is deemed tax free. You do not pay taxes on your gains or when you are withdrawing a portion of your cash accumulation.

An IUL will work best and accumulate the most amount of money when you fund it with a higher premium, which is called max funding. This will allow more of your premium amount to go towards the stock index, therefore growing your cash accumulation. It is also a long-term plan and is a great product to have in your retirement plan. It is for anyone ages 0-60.

Accidental Death and Dismemberment (AD&D) or Accident Insurance

This type of life insurance works two different ways: it will provide a death benefit to your beneficiary if you pass away from an accident and it will provide funds to your family to help cover out-of-pocket medical expenses, loss of wages and so on. This insurance type is by far the cheapest of all but only covers accidents, nothing health related. You can get $50,000 of coverage for less than $15 a month, age dependent of course. There is no medical underwriting, so your current health is not looked at for policy approval. Your rate is also locked in for life. This is a plus for people that can only qualify for a guaranteed issue product but cannot afford the higher premium.

Guaranteed Issue Life Insurance

Guaranteed issue insurance is exactly what it says, it’s guaranteed to be issued to anyone that applies. It is a permanent product, so it lasts until age 120 but requires no medical exam. You must be at least age 40 with most insurance carriers to apply. It also carries a cash value accumulation aspect, just like whole life. The only downside of guaranteed issue is the premiums are going to be pricier. Typically, individuals that cannot qualify for any other plan choose guaranteed issue because it is their only option.

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