Types of Life Insurance – nj.com

INSURANCE

When you buy life insurance, there are two main options: term and permanent life insurance. Term life insurance lasts for a set number of years, while permanent life insurance lasts a lifetime. The type of life insurance policy and the coverage amount that’s best for you will depend on your personal financial situation and needs. Knowing the different types of life insurance can help you make the right decision for your coverage needs.

Term life insurance

Term life insurance offers temporary coverage for a specific timeframe, usually 5 to 30 years. Premiums typically stay level for the entire coverage period, unless you buy decreasing or increasing term life insurance. This policy is sometimes called pure life insurance because it doesn’t provide cash value. As long as premiums are paid and the policy stays in force, your beneficiary will receive the death benefit when you die.

Depending on the company and policy details, you may be able to renew term life insurance yearly until a certain age. There might also be a conversion option before the policy expires, which allows you to convert the policy to a permanent life insurance policy. The company may require a medical exam and rates will depend on your age and health. Fabric term coverage is offered in 10, 15 and 20 year terms, and Fabric says the average 29-year-old woman in excellent health pays just $14.61 per month for $250,000 in life insurance.

Whole life insurance

One permanent life insurance option is whole life insurance. It comes with a guaranteed death benefit, level premiums and a cash value savings account. Unlike term life insurance, whole life lasts a lifetime. The policy may require payments until you reach age 100 or 120. Some policies have limited pay options, which allow you to pay higher premiums for 7, 10 or 20 years, then the policy is paid in full. The cash value can be accessed while you’re still alive, but is not made available to your beneficiary when you die. They will receive the full death benefit, less any outstanding loan balance against the cash value account.

Universal life insurance

Another permanent option is universal life insurance. It’s like whole life, but you can adjust your premium or death benefit if life circumstances change, which is where it gets the name adjustable life insurance. Unlike whole life insurance, which has a guaranteed interest rate on cash value growth, universal life has a guaranteed minimum, but not fixed, rate. If you want a flexible permanent life insurance policy, universal life may be a better option than whole life.

Indexed universal life insurance

Indexed universal life insurance works like universal life, but the cash value is tied to a stock market index, such as the S&P 500. This allows for faster and larger cash value growth, but there is usually a cap on the gains. There may also be a guaranteed interest rate guarantee. If the index goes negative, you will receive zero gain, rather than lose anything in your cash value account. To get the most benefit from this policy, it requires investment monitoring.

Variable life insurance

Variable life insurance offers permanent coverage with a fixed death benefit, like whole life insurance. But you have the option to include the cash value as part of the death benefit with variable life. This policy is also tied to the stock market, so the cash value and death benefit will reflect increases and decreases in market performance. There may be a minimum death benefit guarantee with some variable life policies. This policy also requires monitoring to maximize investment potential.

Variable universal life insurance

Variable universal life insurance is a combination of variable and universal life policies. It offers the same investment potential as variable life insurance, but also includes the death benefit and premium flexibility of universal life. 

Final expense insurance

Designed for seniors, final expense insurance is whole life insurance, but with a smaller death benefit option. Most final expense policies have a $25,000 or $50,000 maximum face amount. Final expense is usually for those aged 50 to 85 and doesn’t require a medical exam. It may be a great option for seniors with a small life insurance need and not in the best health. Those in poor health may want to consider guaranteed issue final expense insurance, which also doesn’t include health history as part of the underwriting process.

Group life insurance

Employers can offer group life insurance to employees as part of the workplace benefits package. Premiums are usually cheaper than getting traditional life insurance because premiums are based on company metrics instead of individual factors. The employer may offer employees basic coverage for free, with the option to buy more for a low cost. Most group life policies aren’t portable, which means if you leave your workplace, you can’t take the policy with you.

Other types 

  • Accidental death and dismemberment insurance: AD&D insurance offers a set death benefit for an insured who dies in an accident, like a car accident or common carrier crash. It will also pay out a smaller amount for limb loss or loss of hearing or sight.
  • Credit life insurance: Banks offer credit life to pay off a specific loan at death, rather than a beneficiary. This could be a home equity loan, mortgage or auto loan.
  • Joint life insurance: This policy is also called survivorship life insurance because it insures two people, usually spouses or partners. A first-to-die policy pays the second person after the first person dies, while a second-to-die policy will pay a beneficiary after both insureds pass away.
  • Mortgage life insurance: Works like credit life insurance, where the beneficiary is the lender, not someone you designate. If you die before you pay your mortgage off, the policy will cover your current balance.
  • Short-term life insurance: This policy is for short-term needs, usually offering coverage for one year. Most companies don’t require a medical exam and may offer the option to convert it to another policy before the short-term policy period expires.
  • Supplemental life insurance: Employers may offer supplement life insurance for employees who want to increase their group life coverage. There is no medical exam and premiums are paid through payroll deduction.

Which type of life insurance should you get?

What type of life insurance you should get depends on your coverage needs and budget. Most New Jerseyans find they have both temporary and permanent needs. A temporary need is something that will go away with time, like:

  • Income replacement.
  • Paying off debts (mortgage, student loans, etc.).
  • Financing your child’s education.
  • Supplementing retirement income.

There are also permanent needs, which remain until death. Examples of permanent needs include covering final expenses for funeral or burial, transferring wealth to heirs, paying for heirs’ estate taxes or taking care of a lifelong dependent.

If you have both temporary and permanent needs, a hybrid approach may be best. Since temporary needs are usually larger, buying term life insurance is the most cost-effective method to satisfy these needs. This leaves the smaller permanent needs for permanent life insurance, which is more expensive. 

For those with enough savings to pay for final expenses, term life insurance may be the only coverage you need. Group life insurance or ADD life insurance may be another option to cover all your life insurance needs. 

Working with a financial advisor or trusted life insurance agent can help you determine your coverage needs and the right mix of policies to fit them and your budget. 

Frequently asked questions (FAQs) 

Which types of life insurance generate cash value?

The types of life insurance that generate cash value are permanent life policies. These policies include final expense, whole life, universal, variable and variable universal life insurance. How much or how fast the cash value will generate depends on the policy type, premium and plan details.

What is basic life insurance?

Basic life insurance is group life coverage that employers offer as part of an employee’s benefits package. The coverage is typically a set dollar amount or multiple of the employee’s yearly salary. Employees may get free coverage or pay a small fee through payroll deduction for basic group life insurance coverage.

What is the most popular type of life insurance?

The most popular type of life insurance in the U.S. is whole life insurance, according to industry research organization LIMRA. Thirty-three percent of the life insurance market have whole life insurance, while only 19 percent have term life. These numbers represent the first three quarters of 2022 total market share.

What is the easiest type of life insurance to get?

The easiest type of life insurance to get is guaranteed issue life insurance. This whole life policy doesn’t require a medical exam or have any health questions on the application. As long as you meet the company’s issuing criteria — which is usually based on age and coverage amount — you are guaranteed approval. However, guaranteed acceptance whole life insurance is the most expensive option, usually only for seniors and typically has low coverage amounts with a cap of $25,000 to $50,000.

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