In the old days, coffee was coffee. Now, there's espresso, French roast, Columbian, Americano, latte, cappuccino, and so on. You almost need a dictionary of coffee terms to order what you want. Talking about life insurance can seem that way too. There are almost as many names for life insurance as there are for coffee.
To help you sort it all out, here's a cheat sheet that outlines 10 common types of life insurance.
- Term life insurance is intended to be used for a limited time, most commonly 10-30 years. After the end of the term, most term policies can be extended on a yearly basis, although the premium will increase.
- Whole life insurance is designed to remain in force as long as the insured lives (and premiums are paid). Whole life insurance comes with guarantees that the premium will never change and that the policy will earn cash value according to the terms of the policy.
- Permanent life insurance is sometimes referred to as “cash value insurance.” The cash value of a permanent* policy can be borrowed and repaid, which is a popular feature of this type of life insurance policy. Click here to read our article, “Three Reasons to Consider a Permanent Life Insurance Policy.” Please note that any outstanding policy loan balances will reduce policy's death benefit
- Universal life insurance (UL) is a form of permanent life insurance. It earns a cash value based on the interest-crediting rate. Another feature unique to universal life is its flexibility. The amount of coverage can be decreased or increased, subject to underwriting, to prepare for the unexpected.
- Final expense insurance is intended to cover burials costs, medical expenses and other debts. It is usually for smaller face amounts, such as $50,000 or less. Final expense insurance usually doesn't require medical exams or tests and therefore can be more expensive than a fully underwritten policy.
- Group life insurance is most commonly provided as part of an employee benefit package. The employer determines the amount of coverage offered; often it is a multiple of salary, e.g. two times salary.
- Interest-sensitive life insurance is any type of life insurance that earns cash value based on a changing interest crediting rate. Some whole life policies may be interest-sensitive and all UL policies are interest-sensitive. Policies that are interest-sensitive will always have a guaranteed minimum interest-crediting rate.
- Variable life insurance has an extra component that offers cash value growth based on designated funds (equity funds, bond funds, etc.). Just as equities carry additional risk and reward, a variable life insurance policy is riskier than a traditional whole life policy.
- Variable universal life insurance (VUL) is one of the most common types of variable life insurance. There are fewer guarantees in a VUL. If the market takes a downturn, additional premium may be required to maintain the policy. Agents are required to have a special license to sell a variable product.
- Voluntary life insurance, like group insurance, is typically part of an employer's benefit package. Unlike group insurance, voluntary life insurance is owned individually and the applicant chooses the amount of insurance coverage. Voluntary insurance may be whole life, term, or universal life.
Now that you know about 10 types of life insurance, you're ready to have an informed life insurance conversation with your financial professional. Ask questions! It's important that you know enough to feel comfortable with your decision.
* As long as required premiums are timely made.
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