Life insurance is one way to ensure that your loved ones are taken care of in the case of your unexpected death. Most life insurance policies will cover all or a portion of burial expenses and grant money to your chosen beneficiaries over a time period specified in your insurance. However, there are various types of life insurance policies that offer different benefits based on the monthly premiums paid by the policyholder. Some different types of policies include:
1. Whole life insurance
This is the most common type of permanent life insurance, and it provides coverage for your entire life. It has a cash value component, which means that part of your premiums go into a cash-value account, where they grow on a tax-deferred basis. Therefore, you do not have to pay taxes for the gains. Once your cash value grows, you can borrow a loan against it or use it to pay premiums. In this type of insurance, the premiums are constant, and the death benefits are guaranteed as long as you pay the guaranteed premiums.
2. Term life insurance
Term life insurance covers a specific length or term of time, usually between 10 and 30 years. If you die during the term, your beneficiaries get a payout, known as a death benefit, but there will be no payout if you die outside the term. The beneficiaries can receive the death benefits as a lump sum, an annuity, or monthly payments. There are usually two versions of this type of insurance — level term and decreasing term. Level term means that the payouts and benefits are the same throughout the policy duration. Decreasing term means that the benefits decrease, usually in annual increments. One of the benefits of this insurance is that it is cheaper compared to others.
3. Universal life insurance
This is another type of permanent life insurance that also has lifetime coverage. Although it has cash value benefits too, they are minimal. In universal life insurance, the premiums are flexible, meaning that you can increase or lower the premiums within the policy’s limits. This insurance also has flexible death benefits. It helps the beneficiaries in the event of income loss to pay for educational funds or mortgages.
4. Variable life insurance
In variable life insurance, the premiums are fixed, and cash value is usually invested in several sub-accounts, like mutual funds. This makes this insurance a better investment option than other insurance policies. You can use the cash value to invest in bonds, stocks, or money market funds. However, your death benefit and cash value might decrease if your investments do not do well.
5. Simplified issue life insurance
While you need to have a medical exam to obtain other insurance policies, you can get a simplified issue life insurance without submitting an exam or with minimal health questions. It is designed to offer a limited amount of insurance quickly—you can get a policy within days, instead of waiting four to eight weeks like in other policies. One of the main drawbacks is that some companies require you to have had the insurance for a certain time, usually two years, before giving out the whole death benefit. The premiums may also be higher than for other policies.
6. Guaranteed issue life insurance
This is a type of small whole life insurance that you can obtain without taking a medical exam or answering many health questions. They have high premiums and low death benefits compared to other insurance policies. Guaranteed issue life insurance is offered by most major insurance companies (i.e., AARP Life Insurance) and usually has a waiting period. If you die within that period, the beneficiaries do not receive the death benefit.