What Are The Different Kinds Of Insurance ?

Having choices is good, but in the world of life insurance, the number of options and terms can seem overwhelming. Sometimes, there are just too many fish in the sea to easily recognize which one you want to reel in.

But don’t worry. A quick overview of the main options available will help weed out the definite no’s and find your best matches.

Life insurance types fall into two main buckets: term life insurance and permanent life insurance. All other types of life insurance are variations of these two.

Different types of life insurance include:

  • Term life insurance
  • Level term life insurance
  • Non-level term life insurance
  • Permanent life insurance
  • Whole life insurance
  • Universal life insurance
  • Indexed universal life insurance
  • Specialty life insurance
  • Final expense life insurance
  • Group life insurance
  • Accidental death and dismemberment (AD&D)
  • Joint and survivorship life insurance
  • Fully underwritten life insurance (exam required)
  • Simplified issue life insurance
  • Guaranteed issue life insurance (no exam)

It’s worth noting that the final three life insurance policies on that list are all technically types of underwriting (or ways of evaluating the risk of insuring someone) but they are often casually referred to as a type of life insurance.

Term life vs. permanent life insurance

Term life is simple, straightforward, and inexpensive life insurance. It covers you only when you need it most, and you get to choose how long the policy will be in effect.

Permanent life is more expensive than term. If you want to see how much more expensive, check out our life insurance rates by age. Permanent life has more complexity because it comes with a cash value that acts a bit like a savings or investment account and grows as you pay your premiums. As the name implies, a permanent life insurance policy covers you for, well, life.

Okay. Differentiating between term and permanent life: check. Now let’s dive into the various types of each.

Term life insurance

People who choose term life insurance typically expect to cover more immediate needs (like 5–30 years down the line, instead of 50 years from now). With a term policy, parents can protect their income until their children grow up. Homeowners can ensure their partner will be able to pay off the mortgage if they die.

Truthfully, most people outlive their term life policies. And that’s a good thing, because most companies offer only up to 30-year terms. Since many people buy term life insurance before reaching middle age, they’re likely to outlive the term of their policy.

There are two common types of term life: level and non-level.

Level term life insurance

May be best for people who want the same costs and benefits over time

With a level term policy, you get the same coverage for the same price throughout the length of your term. Your premiums will never increase, and your death benefits will never decrease.

Non-level term life insurance

May be best for mortgage protection, decreasing coverage needs

With non-level term, your life insurance policy changes steadily over time in one of two ways: either your premiums will go up, or your payout will decrease over time. One example? Mortgage insurance. This type of policy pays the lender the remainder of your mortgage, which decreases as you make your monthly loan payments.

Because the value of a non-level policy decreases over time, you might expect this type of life insurance to cost less. Unfortunately, the price usually remains about the same, so most people opt for level term.

Permanent life insurance

There are three common types of permanent life insurance: whole, universal, and indexed universal.

Permanent life insurance breakdown

Unlike term life insurance, permanent life insurance is designed to cover you for life. You won’t have to worry about going without coverage in your later years or not leaving an inheritance for your kids.

Another reason folks choose permanent life insurance? They see the policy’s cash value as a tax-free savings or investment opportunity. And they’re partly right. Each month, a portion of your permanent life insurance premium goes toward your cash value.

Depending on the type of life insurance policy you have, that cash might sit in a savings account you can borrow against.

Permanent life insurance does have its downsides, of course. It costs more than term, and it can feel more complicated to shop for and maintain a policy.

Whole life insurance

May be best for people who want to lock in a rate for life, then leave an inheritance

Whole life has an appropriate name: it covers you for your whole life, provided you continue paying your premiums. Meanwhile, your cash value collects in a low-interest account.

If you’re looking for life insurance plus a savings account, this type of life insurance could help you check both boxes. Your cash value will slowly grow, and your beneficiaries will receive a payout whether you live to 50 or 150. If that sounds good, check out the top 10 whole life insurance companies.

If you’re looking for life insurance plus an investment vehicle, however, whole life probably won’t make the cut. You could invest in almost anything else and earn a higher rate of return. So let’s look at variable life insurance instead.

Universal life insurance

May be best for people who want to change their policy on the fly

Like variable and whole life, universal life is permanent life insurance, but it differs in two main ways.

First, you can decide how much of your premium goes toward funding your death benefit and how much goes into your cash value account. You can even choose to pay a larger or smaller premium (within limits). Keep in mind, however, the less you pay toward your death benefit, the lower the payout your beneficiaries might receive.

Another important difference between a universal life insurance policy and other forms of life insurance? Universal policies have a maturity (or expiration) date, usually when you reach age 95, 100, or 121. When your policy matures, you receive a lump sum, typically equivalent to your cash amount, and your life insurance coverage ends.

Indexed universal life

May be best for someone interested in flexibility and possibly benefiting from market gains

Indexed universal life insurance is a type of universal life insurance that allows the policy owner to choose to invest the policy’s cash value. The insurance company offers one or more investment options designed to match the growth rate of a well-known index, such as the S&P 500 or NASDAQ 100. That means you can grow your cash value faster without knowing a lot about the stock market.

Specialty life Insurance

In addition to the policy and underwriting types listed here, you may have seen other kinds of life insurance, like final expense or life insurance for couples. These options typically focus on tackling a single life insurance need, such as paying for burial expenses or ensuring children are cared for if both parents die.

You have many specialty life insurance options, but we’ll briefly tackle a few of the most popular choices and why you might want them.

Final expense life insurance

May be best for people with no dependents

Final expense insurance usually comes in the form of a low-payout, short-term (often 10-year) term life policy designed to cover costs for funeral expenses and, in some cases, final medical bills. If you don’t have dependents or debt, final expense insurance could be an excellent low-cost option.

Unfortunately, insurers often require a lengthy waiting period for this to take effect–sometimes up to two years. That means your beneficiaries won’t get the full payout if you die before the waiting period is over, but they may get a return of premium or a partial amount instead.

Group life insurance

May be best for people looking for low-cost supplemental life insurance or those with preexisting health conditions

This type of life insurance is bought as part of a group, often through your employer or a union. Because it is bought in bulk, employers often secure low rates and may help cover some costs for the policies, making them an excellent deal.

Unfortunately, you’ll probably lose coverage if you leave the group (most often when you change jobs), so these policies work best as a supplement to existing life insurance that you control, rather than as a standalone policy.

Accidental death and dismemberment (AD&D) life insurance

May be best for people who want extra protection for physical injuries

AD&D insurance pays out if you die in an accident. The good news is, you don’t always have to die to receive a payout. If you lose a limb or the use of one or both eyes, the insurer will give you a portion of the full payout—provided the loss is due to an accident, not an illness.

The bad news is, it won’t pay out if you die from anything other than an accident. The top three causes of death in the US are cancer, heart disease, and respiratory disease (accidents come in at number four). Accidental death insurance provides fantastic supplemental coverage if you think you’ll likely have an accident in the future, but as stand-alone life insurance coverage, it could fall short of your needs.

Joint and survivorship life insurance

May be best for couples who want to share a policy

You and a partner (usually a spouse, but that’s not a requirement) can apply for joint or survivorship life insurance if you want coverage for two people for little more than the cost of insuring one.

A joint policy pays out the full death benefit when the first partner dies and is designed to provide income replacement for the remaining partner.

A survivorship policy, on the other hand, pays out only when both partners have died, making it a common choice for parents concerned about providing for their children.

Caution: You can’t legally name a minor as the beneficiary of a life insurance policy. If you want to leave money for your underage children, you’ll need to set up a trust and choose a trusted adult to control those funds until your children grow up.

Author: Deepak

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