A simple way to understand the different types of life insurance (2024)

Cash Value Whole Life

Traditional Whole life insurance is a permanent type of insurance. It has a death benefit component and a cash value component. The policy is designed to last your entire life and will eventually pay out a death benefit to a beneficiary. Lifetime coverage is one of the reasons the premiums are much higher than term insurance.

The policy comes in two forms:

• Participating (policyholders receives dividends)
• Non-Participating (policyholders do not receive dividends, but a set rate of return)

Guaranteed Issue Whole Life

Guaranteed Issue whole life is a type of policy that gives you access to permanent insurance with no need for a medical exam or no health questions on the application. If you have any health issues that could medically disqualify you from a traditional policy, guaranteed issue whole life is for you.

There is also a graded death benefit which means the policy comes with a two-year waiting period before the full death benefit will be paid.

Final Expense Insurance

Final Expense policies are a type of whole life insurance coverage that offers a low death benefit and is designed to provide burial insurance coverage. A Final Expense policy is cheaper than a Guaranteed issue whole life policy but does have several medical questions on the application. The average coverage amount is $5,000-$100,000. You won’t need medical exams or a detailed medical history. Only a handful of medical history questions are needed to qualify.

This is much easier to qualify for than traditional whole life and can cover things like funeral costs and end of life expenses.

Guaranteed Universal Life Insurance

Guaranteed Universal Life (GUL) gives you access to permanent life insurance without the higher premiums of a traditional universallife policy. Premiums are cheaper because unlike most permanent policies there is no cash accumulation. It is pure insurance, like a term policy, but the insurance covers you for your entire life.

Indexed Universal Life Insurance

Index Universal Life ties the policy’s cash value account to a market index. If you own an index mutual fund, you will understand the nature of this investment component with this type of life insurance. As a certain index such as the S&P 500 performs, so will the investment. The rate of return will follow the index. There is some investment protection against an index dipping into negative growth. If an index performs poorly, your cash value will not follow the negative trend and lose value. You will be credited only 0% growth for that term. On the other end of the index performance, gains in an index will be capped. This provides greater stability to your investment without damaging the death benefit.

Variable Universal Life Insurance

The Variable Universal life policy contains the most aggressive investment portion of the three types. The cash value in a VUL grows based on a mutual fund like investment accounts. Like any investment account made up of various mutual funds, you have the option of actively managing those investments. You are able to pick from among a group of funds and change the contributions between each group.

The returns in a VUL policy are not capped like an Indexed policy, so the growth rates and opportunities are unlimited. However, the decline in returns is not capped either, and the cash value can see negative growth. Variable Universal Life buyers typically have more experience with investments and are willing to risk losing money on their investment considering they may gain much more than an Indexed policy.

Annual Renewable Term

To get the best possible rate with most policies, you are required to meet certain qualifications through a health questionnaire and often a medical exam. The Annual Renewable Term allows the policyholder to renew the policy after each year expires without having to go through medical underwriting again. Rather than reapplying each year, you can pay the new premium at the older age and continue your coverage. The premium will increase each year due to your older age.

This policy starts off cheap and increases every year, eventually, over time it becomes unaffordable.

Level Term

Level term life insurance is the most popular and common form of term insurance. Level refers to the stability of the premiums and coverages. Once you are qualified for the life policy your premiums will not increase and fluctuate throughout the term. They will remain stable and level throughout the duration of the policy. The coverage you purchased will also stay level until the policy expires.

Return of Premium Term

Return of Premium term gives you all your premium back if you outlive the term and no death benefit is paid. Every dollar you paid over the duration of the policy will be returned to you.

For example, if you purchased a 30 year $500,000 term policy when you were 25, it may have cost you $40/month. Now you are 55 and the policy term is finished. Over those 30 years, you paid $14,400. If you survive the policy term, the premiums you paid will be returned to you without triggering the death benefit.

The premium will be higher than a standard term, but you have the potential of recouping all the premium you paid in.