Types of
Life Insurance
At American Assurance USA, we make life insurance easy to understand. We are always available to help you find the best policy for your loved ones. You shouldn’t have to feel unsure about this process; let us lend a hand.
What is Life Insurance
In its simplest form, when you buy life insurance, you make a contract with a life insurance company. You agree to pay premiums on a periodic basis, and in return, the life insurance company agrees to pay your beneficiaries a sum of money if you die during the term of the policy.
Most people choose life insurance for one primary reason: to help financially protect their loved ones in the event of their death. But life insurance can also be used for other purposes, like supplementing your retirement income or leaving a legacy gift.
There are two main types of life insurance: term life insurance policies and permanent life insurance policies.
Term Life Insurance
Term Insurance provides protection for a specific period of time, or “term.” If you die while the policy is in force, your beneficiaries receive the death benefit.
Term life insurance policies are generally more affordable than permanent life insurance. And because it doesn’t build cash value, it tends to have lower fees.
If you’re healthy and don’t smoke, you can qualify for level premiums, which means your rates will stay the same for the length of the term. If you have health issues or are a smoker, you may still be able to qualify for term life insurance, but your rates will likely be higher.
Term life is also available as a simplified issue life insurance policy, which means you can get coverage without having to take a medical exam. A simplified issue life policy is typically more expensive than a medically underwritten policy, but it can be a good option if you have a health condition that may make it difficult to qualify for life insurance.
Another variation of a term life insurance policy is called Return of Premium (ROP). With ROP, you pay a higher premium than you would for a traditional term life policy, but if you outlive the policy term, you get all of your premiums back, minus any interest that may have accrued. This is not to be confused with the cash value component that is part of whole life insurance policies (more on that later).
Benefits of Term Life Insurance
People who are young and married often look into buying term life insurance because it is cheap and the coverage is high. If the family were to ever need the use of the life insurance policy, it would be like receiving lost income for the surviving spouse.
Policies such as this one are beneficial for people whose children will not be adults or financially independent anytime soon.
The term life insurance benefit is practical for people of all ages, but other policies might be more economical for seniors since they’re less expensive. For example, usually, insurance companies set an age maximum limit of around 80 to 85 years old for their term life insurance coverage.
Permanent Life Insurance
Permanent life insurance policies provide lifetime protection as long as you continue paying premiums and they don’t expire as term life insurance does. If you die while the policy is in force, your beneficiaries will receive the death benefit.
There are several types of permanent life insurance, which we’ll describe in more detail below. But first, it’s important to understand that all permanent insurance policies have two components:
- The death benefit, which is the payout to your beneficiaries if you die while the policy is in force
- The cash value is the money the policy accumulates over time that you can access while alive. It also has a cash surrender value, which is what you would receive if you cashed out the policy before death.
The cash value of permanent life insurance grows tax-deferred, which means you don’t have to pay taxes on it as it grows. And if you withdraw money from the cash value, you only have to pay taxes on the earnings, not the principal. Permanent life policies also have level premiums, which means your rates will stay the same for as long as the policy is in force. It also has a cash surrender value, which is the amount you would get if you cashed out the policy before you died.
Now let’s take a closer look at the different types of permanent insurance.
Whole Life Insurance
Whole life insurance is the original life insurance policy, but it’s not as common as it once was. That’s because whole-life policies are generally more expensive than other types of permanent life insurance, like universal life and variable life insurance.
With traditional whole-life policies, you finance the same life insurance premiums throughout your entire life. This is referred to as continuous pay whole life. Your death benefit will not fluctuate, but your cash value account balance will grow over time.
There are also whole life insurance policies with limited payments, like single premium, 10-year pay, or 20-year pay. These options can be a good choice if you want the death benefit and cash value at a set period of time without having to continuously pay the premiums for your entire life. Premiums paid for these types of policy choices are higher than if you paid continuously throughout your lifetime.
Benefits of Whole Life Insurance
Compared to other types of insurance, whole life offers a few key benefits, like:
- It offers lifelong protection. You’re covered as long as you continue to pay your life insurance premiums.
- It has a cash value component that grows tax-deferred. This means you can borrow against the policy or cash it out if you need to in an emergency.
- The death benefit is guaranteed as long as you continue to pay your life insurance premiums.
- Your premiums will never go up, no matter how old you are or how long you keep the policy.
Whole life insurance can be a good choice if you want lifelong coverage and don’t mind paying higher premiums for the security it offers.
There are also whole life insurance policies that offer additional benefits, like living benefits that can pay you cash if you’re diagnosed with a terminal illness. Some whole life policies even offer bonuses that can increase your survivor payout or cash value.
However, whole life insurance isn’t the right choice for everyone. If you’re looking for more affordable coverage or want the flexibility to adjust your coverage as your needs change, you may be better off with another type of life insurance policy.
Universal Life Insurance
Universal life insurance is similar to whole life insurance, but it offers more flexibility in terms of both your premiums and death benefit.
With universal life, you can choose to pay more or less than the scheduled premium. And if you pay more than the scheduled premium, you can usually increase your death benefit.
Like whole life insurance, universal life has a cash value that grows tax-deferred. You can also access the cash value without incurring any penalties.
With this policy, the difference between premium payments and the current cost of insurance is credited to the cash value of the policy each month. The cash value accumulates interest over time and is debited each month by a cost of insurance (COI) charge as well as any other fees or charges associated with the policy.
The minimum interest rate your account will earn is guaranteed by the life insurance company. But the maximum interest rate is based on market conditions and can go up or down. However, the earnings rate is determined by the insurer and fluctuations in different financial indices, such as stock prices or bond yields. If an earnings rate is pegged to a particular index, then that policy would be classified as an “Equity Indexed Universal Life” contract.
Benefits of Universal Life Insurance
Universal life offers a few key benefits, like:
- It has flexible premium payments. You can choose to pay more or less than the scheduled premium as long as you have enough cash value to cover the policy’s costs.
- The death benefit is adjustable. You can usually increase your death benefit by paying more into the policy.
- You can access the cash value without penalty. You can take out a loan against the cash value or cash it out entirely if you need to.
However, there are also some drawbacks to universal life insurance to consider, like:
The cash value growth is not guaranteed. The interest rate your cash value earns is based on market conditions and can go up or down over time.
- The policy could lapse. If you don’t pay enough into the policy to cover the costs, your policy could lapse and you would no longer have coverage.
Universal life insurance can be a good choice if you want more flexibility with your premiums or death benefit. Just keep in mind that the cash value growth is not guaranteed by the insurance company and there’s a risk that your policy could lapse if you don’t pay enough into it.
Variable Life Insurance
Variable life insurance is a type of permanent life insurance that offers death benefits and cash value growth, but the cash value growth is invested in sub accounts and is not guaranteed by the life insurance company.
With this policy, you choose how your premiums are invested from a selection of investment options offered by the insurer. The most common options include stocks, bonds, and mutual funds.
The performance of your investments will determine the growth of your cash value. If the investments perform well, the cash value will grow. But if they don’t perform well, the cash value could decrease or even disappear entirely.
Unlike whole life and universal life insurance policies, variable life insurance doesn’t have a minimum guaranteed interest rate.
Benefits of Variable Life Insurance
Variable life insurance also has a few key benefits, like:
- You can choose how your premiums are invested. You have the flexibility to choose from a selection of investment options offered by the insurer.
- The death benefit is guaranteed. Even if the value of your investments goes down, the death benefit will still be paid out to your beneficiaries.
However, there are also some drawbacks to variable life insurance to consider, like:
- The cash value growth is not guaranteed. The performance of your investments will determine the growth of your cash value. If the investments don’t perform well, the cash value could decrease or even disappear entirely.
- There are usually fees associated with the investments. The fees can eat into the growth of your cash value and reduce your returns.
Variable life insurance can be a good choice if you want more control over how your premiums are invested. Just keep in mind that the cash value growth is not guaranteed and there’s a risk that your investments could lose value.
Indexed Universal Life Insurance
Indexed universal life insurance is similar to universal life insurance, but with one key difference: The cash value account is invested in an index account, which tracks the performance of a specific market index, like the S&P 500.
With an indexed universal life policy, the cash value can grow at a higher rate than it would with a universal life policy. But it also comes with more risk, since the cash value is still invested in the stock market.
Benefits of Indexed Universal Life Insurance
Indexed universal life offers a few key benefits, like:
- The cash value can grow at a higher rate. The cash value account in an indexed universal life policy is invested in an index account, which has the potential to earn a higher return than other types of life insurance policies.
- You have more control over how you accumulate cash and how it is invested. With most other types of life insurance, the insurer invests the policy’s cash for you. But with an indexed universal life policy, you get to choose which index to invest in.
There are also some drawbacks of indexed universal life insurance to consider, like:
- The cash value growth is not guaranteed. Unlike other types of life insurance, the cash values in an indexed universal life policy are invested in an index account. This means that the cash value can go up or down, depending on how the market performs.
- There are investment risks associated with the policy. Because the cash value is invested in an index account, there is a risk that you could lose money.
Indexed universal life insurance can be a good choice if you want more control over how your cash value is invested and are willing to take on more risk. Just keep in mind that the cash value gains are not guaranteed and there’s a risk that you could lose money.
Final Expense Insurance
Final expense insurance is a type of whole-life insurance that’s specifically designed to cover end-of-life expenses, like funeral costs and outstanding medical bills. This type of policy is usually available to people over the age of 50.
Final expense policies are simplified issue life insurance policies, which means that you can get coverage without having to take a medical exam.
Like other cash value life insurance policies, final expense policies come with the same basic features and benefits, including a policy’s cash value and death benefit.
Final expense policies are typically smaller than other types of life insurance policies, with a death benefit amount ranging from $5,000 to $40,000. And because they’re designed to cover specific expenses, the premiums for final expense policies usually tend to be lower than for other types of life insurance.
Benefits of Final Expense Insurance
Final expense insurance offers a few key benefits, like:
- It can help your loved ones cover end-of-life expenses. The main benefit of final expense insurance is that it can help your loved ones cover end-of-life expenses, like funeral costs and outstanding medical bills.
- The premiums are usually more affordable. Another benefit of final expense is that the premiums are usually more affordable than for other types of life insurance.
There are also some drawbacks to consider with final expense insurance, like:
- The death benefit is usually smaller. One downside of a final expense policy is that the death benefit is usually smaller than for other types of life insurance, ranging from $5,000 to $40,000.
- The coverage is limited. Another downside of final expense insurance is that the coverage is usually limited to end-of-life expenses, like funeral costs and outstanding medical bills.
Final expense insurance can be a good choice if you want to help your loved ones cover end-of-life expenses but don’t need a lot of life insurance coverage.
Guaranteed Issue Life Insurance
Guaranteed issue life insurance is a type of whole life insurance that’s available to people with pre-existing medical conditions.
With this type of policy, you can get coverage without having to go through a medical exam. However, guaranteed issue policies tend to be more expensive than traditional life insurance policies.
They also have lower death benefits, since the insurer is taking on more risk by not requiring a medical exam.
Benefits of Guaranteed Issue Life Insurance
Guaranteed issue life insurance offers a few key benefits, like:
- It’s available to people with preexisting medical conditions. The main benefit of GI life insurance is that it’s available to people with preexisting medical conditions.
- You don’t have to take a medical exam. Another benefit of guaranteed issue is that you don’t have to take a medical exam to qualify for coverage.
There are also some drawbacks to consider with guaranteed issue life insurance, like:
- The premiums are more expensive. One downside of guaranteed issue is that the premiums are more expensive than for other types of life insurance.
- The death benefits are lower. Another downside of guaranteed issue life insurance is that the death benefits are usually lower than for other types of life insurance.
Guaranteed-issue life insurance can be a good choice if you have a preexisting medical condition and want to get life insurance coverage without having to go through a medical exam.
Group Life Insurance
Group life insurance is a type of life insurance that’s offered through an employer or other organization.
With this type of policy, the premiums are usually paid for by the employer or organization. And the death benefit is typically paid out to the beneficiary designated by the policyholder.
Group policies tend to be less expensive than individual life insurance policies. And they’re often available to people who might not otherwise be able to get coverage, like people with preexisting medical conditions.
Benefits of Group Life Insurance
Group life insurance offers a few key benefits, like:
- The premiums are often paid for by the employer. The main benefit of group life insurance is that the premiums are often paid for by the employer or organization.
- It’s often available to people with preexisting medical conditions. Another benefit of group life insurance is that it’s often available to people with preexisting medical conditions.
There are also some drawbacks to consider with group life insurance, like:
- The coverage may be limited. One downside of group insurance is that the coverage may be limited. For example, some policies only cover up to $50,000 in death benefits.
- The coverage may end when you leave the organization. Another downside of group insurance is that the coverage may end when you leave the organization. For example, if you leave your job, you may no longer have access to the policy.
Group life insurance can be a good choice if you want to get life insurance coverage at a lower cost. It can also be a good choice if you have a pre-existing medical condition and may not be able to get coverage through an individual life insurance policy.
How Much Life Insurance Do I Need?
You may have heard it said that you need eight to 10 times your annual salary in life insurance. That’s a good place to start, but it’s not always that simple. The death benefit amount you’ll need depends on many factors, including how much debt you have, whether you’re the primary breadwinner in your family, how many dependents you have and what financial resources they would have available to them if you were no longer around. Here’s a closer look at each of these factors:
Do you have any debt?
How many people rely on you financially?
What financial resources would your family have?
This includes things like mortgages, car loans, student loans, credit card debt and any other outstanding loans. If you have debt, your death benefit should be enough to pay it off. This is especially important if you’re the primary breadwinner in your family. If your death would leave your spouse with a large amount of debt and no way to repay it, you’ll need a larger death benefit to give them peace of mind.
This includes your spouse, children, elderly parents, or any other family members who would be financially impacted by your death. If you have dependents, your death benefit should be large enough to cover their living expenses for a period of time. This could be until they finish school, get a job, or are otherwise able to support themselves financially.
This includes things like savings accounts, investments, pensions, and life insurance. If you have significant financial resources, your death benefit may not need to be as large. But if you don’t have many financial resources, your death benefit will need to be larger to make sure your family is taken care of.
Choosing the Right Life Insurance Policy
Now that you know more about the different types of life insurance, you might be wondering which one is right for you. The type of policy you choose should depend on your needs and goals.
No matter which type of policy you choose, be sure to shop around and compare rates from different life insurance companies. And, don’t forget to read the fine print so you understand the terms and conditions of your policy.
Once you’ve chosen the right life insurance policy, be sure to pay your premiums on time to keep your coverage in force.
Life insurance policies are an important part of financial planning, but they can be complex. If you have any questions about life insurance, talk to a licensed insurance agent or financial advisor. They can help you understand your options and choose the right policy for you.
The Bottom Line
There are many different types of life insurance policies to choose from, and the best one for you depends on your specific needs and situation. Be sure to compare different policies before making a decision.
At American Assurance, we have made the shopping process easy and stress-free. We are here to assist you in protecting your family’s financial future. We offer a variety of options from multiple A-rated life insurance companies so that we can find the policy that perfectly fits your needs.
If you’re interested in Final Expense, Whole Life Insurance, Term Life Insurance, Variable Life Insurance, Index Universal Life Insurance, or Universal Life Insurance feel free to reach out for a quote today.