Understanding The Different Types of Life Insurance Policies

Shawn Plummer

CEO, The Annuity Expert

Life insurance is a crucial part of financial planning and should not be overlooked when considering your long-term goals. Whether you are just starting, in the middle of raising a family, or beginning to plan for retirement, life insurance policies offer exceptional protection for everyone’s needs. Understanding what these policies entail is essential to determine which suits your and your family’s needs most effectively. This guide will explain life insurance and discuss the available types and benefits. We hope that by the end, you will better understand how to make responsible decisions when selecting life insurance plans for yourself and your loved ones.

What Is A Life Insurance Policy?

A life insurance policy is an agreement between an insurer and a policyholder to pay a death benefit if the insured person passes away during the term of the policy. Life insurance aims to protect your family and dependents from financial hardship in the event of your death. It can also be used to help with funeral costs, estate planning, and providing inheritance.

Life insurance policies typically pay the death benefit in a lump sum or installments over time to the beneficiary. The amount of coverage you need and the type of policy you choose will depend on your individual needs and circumstances.

Many life insurance policies include term life, whole life, variable life, and universal life. Each offers different advantages and disadvantages depending on your unique situation, so it is essential to understand the differences between them before purchasing a policy.

It’s also important to consider the various riders available with your life insurance policy, such as accelerated death benefit or critical illness coverage. These can provide additional protection and financial security in case of a covered illness or condition.

Understanding The Different Types Of Life Insurance Policies (2023)

What Is Covered In A Life Insurance Policy?

Life insurance provides essential financial protection for your beneficiaries in the event of death from myriad causes, including accidents and natural causes. However, certain conditions may limit an individual’s ability to receive their payout upon your passing. Therefore, it’s essential to carefully read and understand the terms and conditions of your policy before making a purchase. Additionally, some policies are designed to cover only specific death scenarios or may have limited payouts in certain circumstances.

It is also essential to keep your life insurance policy up-to-date by regularly reviewing your coverage and ensuring that it remains current with your lifestyle and family situation. It would be best if you also considered whether or not you would be covered in the event of disability or illness, which can pose a financial burden for those unable to work.

Finally, ensure that your beneficiaries know about your life insurance policy to claim the payout if necessary. It is essential to keep them informed of any changes you make to your policy and provide clear instructions on how they can claim the proceeds. This will ensure that your loved ones are taken care of in case anything happens to you.

For help with setting up an estate plan affordably, we recommend the following:

What Are The Different Types Of Life Insurance Policies?

What Are The Three Main Types of Life Insurance?

There are three primary kinds of life insurance, each one serving a distinct purpose: 

  • Term Life Insurance
  • Whole Life Insurance
  • Universal Life Insurance

Depending on your needs and goals, each life insurance can have its benefits and drawbacks. Let us fully explore every type here so you can make an informed decision.

What is Term Life Insurance?

Term life insurance policies provide coverage for a predetermined time, usually anywhere from 10 to 30 years. It pays out a death benefit to your designated beneficiary if you die during the term but does not have any cash value while alive. It is generally much cheaper than whole life or universal life insurance and can protect for a fixed period. It can help your family maintain their lifestyle if something happens to you.

The most common type of term life insurance is level term life insurance. This offers the same premium throughout the term length. This means that the cost of coverage does not go up as you age or your health changes.

You can also opt for a decreasing-term life insurance policy, which is less common. This type of policy has premiums that decrease over the policy’s life, but the death benefit remains the same throughout the term. This may be attractive to those who are looking for long-term protection at an affordable rate.

What Is Term Life Insurance?

What is Whole Life Insurance?

Whole life insurance is a type of permanent life insurance offering lifelong coverage and exclusive access to cash-value investment opportunities. In contrast to term life insurance that covers you for a particular duration, whole life never expires as long as premiums are paid in full. The insurer then invests your money on your behalf into the “cash value” component of the policy, which you can access under specific conditions.

Whole life insurance provides guaranteed death and living benefits such as tax-deferred cash accumulation and potential access to policy loans. Depending on the type of whole-life policy, premiums may be level or increasing, and the death benefit may be flexible, level, or a combination of both.

Whole life insurance provides lifelong protection for you and your loved ones. It can help cover funeral expenses, medical bills, debts, mortgages, and education costs. When considering if whole life insurance is right for you and your family, it’s essential to consider your unique needs and budget. A financial advisor or insurance professional can help you find a policy that fits both.

Whole life insurance is an excellent choice for those who want lifelong protection, guaranteed premiums, and the potential to accumulate cash value over time.

What is Universal Life Insurance?

Universal life insurance is a flexible, permanent type of coverage that allows you to adjust your death benefit and monthly payments. Just like whole life insurance, it can secure protection for as long as you live and is a cash-value life insurance policy that can be accessed over time. With universal life coverage, you get all these benefits in one product!

Whole life and universal life insurance policies allow you to remain flexible in how much money is spent on premiums or the death benefit payout. If your financial situation changes, you can easily adjust accordingly. Additionally, as long as there’s enough cash value saved up for that month, it’s possible to skip paying a premium altogether if necessary – significant for those times when money is tight!

Like other forms of life insurance, universal policies also come with a wide range of riders. For example, these add-ons give you access to features like an accelerated death benefit or long-term care coverage. With a universal policy, you can tailor your coverage to fit your individual needs.

Universal life insurance is an excellent option for long-term financial security and flexibility. It’s a valuable asset to provide peace of mind that your family is taken care of should something happen to you.

Compare The Different Types Of Life Insurance Policies

Use our calculator to compare term, whole, and universal life insurance coverage rates.

What Is A Death Benefit?

Purchasing life insurance is primarily done to secure a death benefit – the sum of money your insurer will pay out to those you designate if you tragically pass away during the policy’s term. In the past, life insurance was purchased primarily for death benefit purposes. However, many modern policies offer a variety of additional features, such as cash values and living benefits.

When it comes to death benefits, there are two primary options available:

  • Level Death Benefit: A life insurance payout that remains the same no matter when death occurs, whether shortly after purchasing a policy or much later in life.
  • Flexible Death Benefit: The policyholder can adjust the death benefit by reducing its amount. On the other hand, if one wishes to raise their death benefit, that may necessitate a new underwriting process.

What Is A Life Insurance Rider?

Are you looking for extra coverage? Riders are the perfect solution to supplement your life insurance policy, with a wide range of options available at an additional cost. From critical illness protection to events not covered under standard policies, riders can provide you with peace of mind during times when you need it most. Riders also offer additional financial benefits, such as borrowing against your policy or converting it into a retirement plan.

Standard life insurance riders include:

  • Accidental Death Benefit: An additional payout if you die due to an accident.
  • Waiver of Premium: You are not required to make payments on your policy if you become disabled.
  • Guaranteed insurability: The standard to purchase additional coverage at predetermined ages and times without providing evidence of insurability.
  • Accelerated Death Benefit: Allows you to access a portion of your policy proceeds before you die in the event of a terminal illness or injury.
  • Spousal Rider: This rider ensures that you and your spouse are covered without purchasing two separate policies, with the surviving partner being named as the beneficiary.
Understanding The Different Types Of Life Insurance Policies (2023)

How Much Life Insurance Coverage do I Need?

The amount of life insurance coverage you need depends on your financial goals and objectives. Generally, the younger and healthier you are, the more coverage you should purchase. Consider factors such as your spouse’s income, how many children you have, any outstanding debts or mortgages, and your estimated funeral expenses when determining how much coverage is necessary.

Remember that life insurance proceeds can provide a financial cushion for your loved ones after you pass away. Make sure to purchase enough coverage to protect them in the event of your death. It’s also essential to review and adjust your policy regularly, as changes in your lifestyle or financial obligations may necessitate reevaluating your need for life insurance.

When purchasing life insurance, the key is ensuring you have enough coverage to protect your loved ones. Talk with an experienced financial planner or insurance advisor to better understand what coverage would be best for your circumstances. Proper planning ensures that your family will be cared for if something unfortunate happens.

How Much Does Life Insurance Cost?

The cost of life insurance varies greatly depending on various factors, such as age, health, the amount of coverage you need, and the type of policy you select. Generally speaking, younger individuals in good health can expect to pay less for life insurance than older people who may have preexisting medical conditions.

The amount of coverage you need can also significantly impact the cost. As you increase the coverage, the premiums will also typically increase. When selecting coverage, it is vital to ensure that you purchase enough coverage for your needs but not too much that it significantly increases your monthly premiums.

The type of policy you select will also determine how much life insurance will cost. Term life insurance is generally less expensive than whole life and universal life policies but does not build cash value. Permanent coverage includes a savings component that builds over time, allowing you to access the money in certain circumstances; however, this type of policy may also be more expensive initially.

Ultimately, the cost of life insurance will depend on your individual situation, so it is vital to research and speak with a financial professional who can help you find the right policy to meet your needs at a price you can afford.

How do You Buy a Life Insurance Policy?

When it comes to purchasing life insurance, you have a few choices. You can use the services of an independent local insurer, shop through an online broker who is not affiliated with any single company, or buy directly from the insurance company.

To start, identify your budget and determine how much coverage you need. Then, check out the life insurance policies offered by different companies to compare features and pricing. Consider the cost of premiums, policy terms and conditions, customer service experience, riders (optional benefits) such as long-term care or disability income insurance that may be available for an additional cost, and the insurer’s financial strength ratings.

Once you’ve narrowed your choices, it’s time to purchase the policy. Many insurers offer online applications that allow you to apply for coverage quickly and easily from any device with an internet connection. You’ll need to provide personal information such as your address, date of birth, Social Security number, and beneficiary information. You may also need to provide medical or financial records if requested. After applying, you’ll usually receive an answer within a few days.

Finally, it’s essential to read through the policy carefully before signing to understand precisely what is covered and how much coverage you have purchased. Be sure to ask any questions about the policy before signing.

Once the policy is active, you can rest easy knowing that your family and loved ones will be taken care of should something happen to you.

Do I Need to Take a Medical Exam To Get Life Insurance?

It depends on the type of life insurance you’re looking for. Term Life Insurance typically does not require a medical exam. However, other policies like Whole Life or Universal Life may require a medical exam to determine your eligibility and potential rates.

Additionally, some companies offer “no medical exam” life insurance policies. However, the rates may be higher and the coverage more limited. It is still important to discuss your options with a professional before making any decisions.

What Happens if I Stop Paying my Life Insurance Premiums?

If you fail to make life insurance payments, you must be aware of the consequences. Usually, after a certain number of skipped payments, your policy will become inactive.. As soon as this occurs, the beneficiary named on the policy won’t receive money or other benefits if death comes unexpectedly.

However, some insurers will allow you to reinstate the policy within a certain period of time by paying any missed premiums and possibly other fees. However, if the policy is not reinstated, it is canceled and no longer provides coverage.

Once your policy lapses, you may also owe taxes on any unearned premiums paid in advance. Additionally, if your policy had any cash value at the time of lapse, you may also be subject to taxes on those funds. Understanding how your policy works and keeping up with premium payments is essential, so you don’t risk losing coverage or owing unexpected taxes.

If you have trouble affording premiums or have any questions about your life insurance policy, the best thing to do is contact your insurer. They can help provide more information and discuss payment options that may be available to you. Understandably, it can be challenging to keep up with life insurance payments when finances are tight, so if you’re having trouble affording premiums or have any questions about your policy, don’t hesitate to reach out to your insurer.

Is Life Insurance Worth Purchasing?

The decision of whether or not to purchase life insurance is a personal one and depends on your individual needs. If you have dependents, such as a spouse and children, who rely on your income to provide for their basic needs, then life insurance may be a good idea. Life insurance can help ensure that they will be taken care of financially in the event of your death.

It is also important to consider your financial goals and determine if life insurance can help you reach them. Life insurance policies offer a death benefit that can be used for expenses such as college tuition, mortgage payments, or other large purchases. It may also be used to pay off debts or funeral costs in the event of your death.

With all this in mind, life insurance can provide peace of mind and financial security for those with dependents or other financial goals. If you think that life insurance is right for you, it’s crucial to weigh the pros and cons and make an informed decision. Be sure to speak with an insurance professional or financial advisor before making any decisions.

Next Steps…

Securing life insurance is a significant step in any financial plan. With the right policy, you and your family can rest assured that they will be taken care of financially if anything happens to you. Different policies are available, so it’s essential to thoroughly research all options and work with an experienced advisor to ensure you pick the ideal coverage for your loved ones. Contact us today for more information about life insurance possibilities and get a free quote!

Different Types Of Life Insurance Policies

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Frequently Asked Questions

What are the three main types of life insurance?

The three main types are whole, universal life insurance, and term life insurance.

The two types of life insurance are?

Term life insurance and permanent life insurance are the two main types.

Do I Need To Take A Medical Exam To Get Life Insurance?

It depends on the type of life insurance you’re looking for. For example, term Life Insurance typically does not require a medical exam. However, other policies like Whole Life or Universal Life may require a medical exam to determine your eligibility and potential rates. Additionally, some companies offer “no medical exam” life insurance policies. However, the rates may be higher and the coverage more limited.

*Disclosure: Some of the links in this guide may be affiliate links. I may receive a commission at no cost if you purchase a policy. It helps us keep the lights on!

Shawn Plummer

CEO, The Annuity Expert

I’m a licensed financial professional focusing on annuities and insurance for more than a decade. My former role was training financial advisors, including for a Fortune Global 500 insurance company. I’ve been featured in Time Magazine, Yahoo! Finance, MSN, SmartAsset, Entrepreneur, Bloomberg, The Simple Dollar, U.S. News and World Report, and Women’s Health Magazine.

The Annuity Expert is an online insurance agency servicing consumers across the United States. My goal is to help you take the guesswork out of retirement planning or find the best insurance coverage at the cheapest rates for you. 

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