Life Insurance

Types Of Life Insurance

Aug 14, 2020
Children having play time in living room
Buying life insurance can be a confusing process. With all the different variations available, how do you decide what type of policy is right for you? At Ethos, our mission is to make buying life insurance simple and straightforward, so we’ve provided this guide to help you understand all the different types of life insurance and which one may best fit your needs. Let’s start with the two main types of life insurance—term and permanent.

Understanding Term Life Insurance

Term life insurance is simple, straightforward, and inexpensive. You’ll choose an amount of time that you’d like to be covered and the amount of the death benefit.

Term life insurance is great for people looking for income replacement protection for a specific amount of time, typically during financially challenging stages of their life, like paying off the mortgage, or putting the kids through school. If the insured were to pass during this period of time when an income is critical to the wellbeing of the family, a term life insurance policy could continue to maintain the established lifestyle. Without insurance during this time, the family could be faced with financial hardship.

Types of Term Life Insurance

Term life insurance comes in a variety of different forms. If you’re considering a term policy, here are some of the options you’ll have to pick from.

Guaranteed Level Term Life Insurance

This is the most common and straightforward type of term life insurance. With guaranteed level term life insurance, the premiums are guaranteed to not go up during the life of the term. The terms are typically offered for periods of 10, 20, or 30 years. This type of coverage is best suited for those who are looking for coverage for a specific amount of time, and don’t plan on renewing at the end of their term.

Convertible Term Life Insurance

This type of term life insurance can be converted into a permanent policy once your term expires, without requiring the policyholder to go through the health qualification process again. It can be useful for those looking for the flexibility to switch towards a more permanent form of life insurance as your needs change.

Renewable Term Life Insurance

Renewable term life insurance allows you to renew your coverage at the end of your term, with the same or reduced death benefit. While your premiums will be more expensive when you renew, the advantage to this type of life insurance is you won’t have to start the application process again, or take a medical exam.

Return of Premium Term Life Insurance

Return of premium life insurance offers the chance to get some or all of the premiums back that you’ve paid into the policy at the end of the term. This type of protection— usually offered in the form of a rider—can be attractive to those who anticipate outliving their term and looking for a refund of some of what they’ve paid into their policy. However, this coverage will generally cost more than a typical term policy.

Understanding Permanent Life Insurance

Permanent insurance comes with many more options and due to the duration of the coverage, is often a more expensive type of life insurance. As you might expect, these types of policies also have more intricacies that are important to understand as you consider whether it’s right for you.

Permanent life insurance is great for people looking for life-long coverage and are interested in covering final expenses, legacy planning, or cash value accumulation. With a permanent life insurance policy in force, the cash value can be accessed for emergencies or to supplement retirement income, and the death benefit will be paid to the beneficiaries upon the passing of the insured.

Cash Value

Permanent life insurance products typically have a cash value component in addition to a death benefit. Part of the premiums you pay go towards building up cash value, which also earns interest. Depending on the policy features, you may be able to withdraw or borrow the cash value that has accumulated in the policy. Cash value that has been withdrawn or borrowed against will usually decrease the death benefit. Refer to the specific policy for details regarding accessing the cash value and how it may impact the death benefit paid by your policy.

Policy Length

Permanent life insurance policies remain in force and will pay a death benefit as long as you make the premium payments according to the payment schedule. Term policies also require on-time premium payments for the policy to remain in force, but when the predetermined “term” is up, the policy expires. What this means is that if the insured dies while a term life insurance policy is in force, the death benefit will be paid. If the insured passes after the term of insurance has expired, no death benefit is paid.

Types of Permanent Life Insurance

The phrase “permanent life insurance” covers many different types of life insurance. If you decide that a permanent life insurance policy is the best fit for you, here are a few of your choices:

Universal Life Insurance

Universal is a type of permanent insurance, meaning it lasts your whole life when required premiums are paid. Universal life insurance typically has the cash value component previously described, which can usually be accessed with a policy loan or withdrawal.

A unique feature of universal life insurance is that the policy owner can choose to adjust the premiums paid, as long as the minimums to maintain the insurance are made. If the owner chooses to pay more than the minimum premiums, the cash value and death benefit can increase. When the minimum premiums are paid, the cash value and death benefit will also be at the minimum level. If the owner pays less premium than required to maintain insurance, the policy could lapse, so premium payments must be carefully managed with universal life when less than minimum are paid. Accumulated cash value can often be used to pay premiums, but once depleted, the owner will need to resume payments to maintain coverage.

Finally, universal life policies can use assumed interest rates when determining the minimum non-guaranteed premium payments due. If the current guaranteed interest rates are lower than the assumed illustrated rates, there is a chance additional premium will need to be paid to maintain coverage. The flexibility regarding premium payments is one of the main advantages of universal life insurance, but that flexibility can also make maintaining coverage while paying minimum premiums a bit challenging.

Variable Life Insurance

This type of life insurance policy carries more risk, because a variable policy can have market exposure through the insurance company’s separate account. The separate account is typically managed by experts within the insurance company, where the funds allocated to the separate account options are managed at an aggregate level. Depending on the risk tolerance of the policy owner, a policy can realize gains and losses in investment options with portfolios composed of fixed accounts, money market funds, bonds, mutual funds, and/or stock options. The owner can determine which options meet his or her objectives by allocating policy values to one or many of the options available.

Because of these variable options, the value of the life insurance policy can increase or decrease based on the performance of the options where policy funds have been allocated. The gains can increase the policy cash value and death benefit, and the losses can reduce them. While a minimum death benefit is guaranteed, the premium required to keep a variable policy in force can increase when values are low.

The tax-deferred growth potential resulting from variable funds can be attractive to people, especially those who are interested in choosing from the investment options available within the policy. An insurance agent licensed to sell variable funds can be a great resource to learn more, or to discuss further if you have questions regarding variable life insurance products.

Indexed Universal Life Insurance

An indexed universal life insurance policy offers the policy owner an option to participate in indexed accounts. An indexed account is an account where the profit and losses of the account are tied to a specific index, like the S&P 500 Index, for example. Often the index option available to the policy owner has a guaranteed floor to reduce possible loss exposure, and a cap to maximize gains. The policy owner can usually decide how much policy value should be allocated to the indexed option, and how much should stay in the general account of the insurance company. Each index is different, so if this sounds like an interesting option, discussing the details with an agent licensed to sell variable products would be a good place to start.

Variable Universal Life Insurance

This hybrid policy is a combination of universal life insurance and variable life insurance. Many variable policies available today are actually variable universal life insurance policies, because they provide more flexibility to the policy owner. The policy owner can determine how much of the policy value should be allocated to the carrier’s separate account for exposure to the market options selected by the policy owner, and how much should stay in the carrier’s general account earning guaranteed interest.

Variable Indexed Life Insurance

As you may have guessed, this hybrid policy is a combination of indexed universal life insurance and variable universal life insurance. This hybrid provides the policy owner with the flexibility of allocating a portion or all of the policy values to the general account where guaranteed interest can be earned, or the separate account of the carrier, to participate in either variable options or indexed options. Again, if this sounds interesting to you, talk to an agent who is licensed to sell variable products to get more information.

Simplified Issue Life Insurance

Simplified issue life insurance can refer to either term or permanent insurance. Because the application process is “simplified,” it doesn’t require a health exam, making it worth considering for people with underlying health issues. However, you’ll still have to answer some questions about your health. The insurance company will likely want to know if you’re a smoker, or if you’ve been diagnosed with any major illnesses. This type of insurance is favorable for people who are looking to obtain some level of coverage quickly, and/or those who don’t wish to go through a medical exam.

Guaranteed Issue Life Insurance

Guaranteed issue life insurance can refer to either term or permanent insurance. Because the application process is “guaranteed,” it doesn’t require a medical exam or any information about your health, and offers the applicant the security of guaranteed coverage by skipping the traditional underwriting process. This type of insurance is a good fit for someone looking for a policy with a quick and easy acceptance process to help cover their final expenses and build cash value over time.

Ethos offers a guaranteed issue whole life insurance option for applicants aged 60 to 85, with a death benefit of up to $25,000.

Final Expense Insurance

If your primary goal with life insurance is to cover funeral expenses, final expense insurance may be the way to go. You’ll get the peace of mind that comes with protecting your loved ones from having to pay for any burial, medical, and funeral costs associated with your death.

Group Life Insurance

If your employer offers free life insurance, by all means, take it. Most people change jobs many times throughout their lives, though. When you go to work for a different company, you’ll likely lose your life insurance coverage and your new employer may or may not offer it.

Even if you have coverage through work, it’s a good idea to purchase a life insurance policy separate from your job. Most employer-provided policies offer something like 1-3X your salary, which is far less coverage than what is typically recommended.

Buying life insurance is an important part of your financial health. Choosing the right policy is a personal process completely dependent on your specific circumstances.

If you are curious about which life insurance policy with Ethos is the best fit for you, and how much it may cost, you can find out in just a few minutes, right here.