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If you have a car, you have car insurance. if you own a house, you have homeowners insurance. if you have a life . . Well, it only makes sense to have life insurance, right?
Life insurance is one of the most vital pieces of your family’s long-term financial plan, and it’s the one we least want to discuss. its purpose is simple: to replace your income for your family if you die. But with all the options available, finding a policy that’s right for you can lead to extreme confusion and frustration.
Fortunately, it doesn’t have to be that way. We’ll walk you through the most common life insurance policies and help you find the one you need.
here is a list of different types of life insurance:
different types of life insurance
- term life insurance
- permanent life insurance
- whole life insurance
- universal life insurance
- variable universal life insurance
- indexed universal life insurance
- no medical exam insurance
- simplified issue life insurance
- guaranteed issue life insurance
- joint life insurance (first to die)
- survival life insurance (second to die)
- final expense insurance
- Decreasing Term Life: Mortgage Life and Credit Life Insurance
- accidental death and dismemberment insurance
- group life insurance
- fees: be careful with management fees. they are real and they are strong.
- Annual Renewal Term: Expect smaller portions of your premium to “roll over” annually or be applied to the cash value investment portion of your policy, and then larger portions “roll over” or apply annually to the insurance portion of your policy.
- Simplified Issue Life Insurance: These policies do not require a medical exam, but do require applicants to complete a health questionnaire.
- Guaranteed Issue Life Insurance: Guaranteed issue has even fewer strings attached than the simplified policy: you don’t even have to answer any questions about your health! Many companies limit this type of coverage to people who are at least 40 years old, and some companies don’t offer it to people over 80. But if you’re in that wide range, you probably qualify. One drawback here is that your policy will be under what is known as a gradual death benefit. In other words, if you, as the policyholder, die within the first few years of purchase, your beneficiaries would receive only a defined portion of the total death benefit. This type of policy allows those who have been denied other life insurance due to health problems to obtain enough life insurance to cover final expenses after death.
- This is generally the lowest cost type of life insurance you can buy.
- does the only thing life insurance is supposed to do: replace your income when you’re gone.
- It’s a proactive way to care for your loved ones today, so they don’t have a financial burden after you pass away.
explanation of common types of life insurance policies
Term life insurance is the simplest (and usually the most affordable) type of life insurance you can buy. That’s because it’s insurance that does one thing: It pays the people you choose (your spouse, children, or other beneficiaries) a set amount of money if you die.
but a term life policy is worth nothing unless you die during the term. (we said it wasn’t a fun thing to talk about). The bottom line is that it’s a way to proactively care for your loved ones so they don’t have to worry when you’re away.
Think of it like your car insurance. Every six months (or maybe every month), you pay your insurance company. if you have a wreck, they pay the claim. but if you don’t have a wreck? you don’t expect a refund of your premiums just because you didn’t have an accident.
With term life insurance, you pay the insurance company to bear the financial risk of your death during the period (or term) of your policy. typical terms are 10, 15, 20 or 30 years. So if you buy a 15-year term life policy with $500,000 coverage, you’ll make a monthly payment for 15 years. if you die during those 15 years, the insurance company will write your family a check for $500,000, also known as the death benefit.
If you’ve listened to Dave Ramsey for more than five minutes, you’ve probably heard him say that term life insurance is the only life insurance policy you should get. We recommend that you purchase a term life insurance policy worth 10 to 12 times your annual income. that way, your income will be replaced if something happens to you. this is the cheapest way to protect your family in the long run. more on that later.
There are two main types of life insurance (with a few other varieties we’ll cover later). But the basic types are term life insurance (which, as we just said, is the best and cheapest way to get life insurance) and permanent life insurance. Although all the different forms of permanent life insurance are much more expensive and confusing than term life insurance, that doesn’t mean they’re not popular. We believe that’s because many people simply lack information about these scams. Let’s talk about types of permanent life insurance!
types of permanent life insurance
Whole life insurance is one of the most common examples of permanent life insurance, and since it’s such a widespread form of scam, errr, policy, we’ll jump right into it to try to guide you. away from him.
If term life insurance is fairly easy to understand, permanent life insurance policies like whole life insurance is where it gets really tricky. That’s partly because it’s a financial product that tries to do two things at once. it’s trying to provide life insurance benefits, paying your beneficiaries in the event of your death, and trying to be an investment account at the same time.
When you buy a whole life policy, you lock in the premium amount for as long as you want the policy. sounds good, right? And each month when you pay your premium to the insurance company, a portion of that premium goes into a cash value account that grows over the life of the policy. get it? whole life?
The longer you have the policy, the more cash value it will have. It really is like a savings account. So why don’t we recommend this approach to life insurance? because your life insurance has one job: to pay your beneficiaries if you die. all life does this and increases the cash value, so you generally pay more for less insurance.
This is why whole life insurance can be much more expensive than term life insurance. Even worse, whole life policies don’t earn as much cash value as the extra amount you’re paying would if invested in a good mutual fund. Does it make sense to spend more money for less coverage and a bad long-term investment? (hint: it doesn’t).
Besides permanent life insurance, there are quite a few other types of permanent life insurance. What all of these policies share is some form of the feature we already mentioned: cash value. Think of cash value life insurance like a savings account that you put money into each month. it is a fund of money that you own and can access or borrow from. the longer you have the policy, the more cash value the policy will have.
Another big difference between term life policies (which we recommend) and permanent life policies (which we don’t) is that permanent policies don’t expire. continue until you die or stop paying your premium.
The details of how much your family gets, how the cash value grows, and other questions depend a lot on the policy you buy. therefore, beyond whole life, permanent life insurance policies may also include universal life, indexed universal life, or variable universal life.
Like a whole life policy, universal life insurance has a death benefit and a cash value. But unlike whole life policies, universal life insurance policies offer adjustable premiums, which means you may be able to access some of the cash value to adjust your annual payment.
Either way, you are not exempt from responsibility for the minimum premium payment to maintain the policy. but you may be able to waive a premium payment based on its potential cash value. or you can choose to leave things alone and possibly build up some cash value over time.
Which brings us to the long-term investment “strategy” of this type of policy. Basically, part of the monthly premium for a universal life policy goes toward the death benefit and part is invested as “savings.” the idea is that the investment grows over time, and perhaps even enough to fully offset the premiums.
but really, this is a bad investment strategy. why? two things:
An annual renewal term might help cover the increased risk of death as you age, but that will be the only thing that increases, definitely not your savings! you’re better off getting a term life policy and investing in a mutual fund for better returns.
Remember how whole life and universal life policies try to do too many things at once? so are variable universal life policies. they just get more complicated! Variable universal life policies try to be a life insurance policy, a savings account, and a mutual fund all at the same time. and that is expensive.
Variable universal life insurance lets you decide how your cash value is invested. Just like with a traditional mutual fund, there are dozens of risk levels you can choose from. You are presented with a large number of investment options for their cash value, and you can choose how risky you are with those investments. that’s the “variable” part. however, it is key to remember that insurance is about risk and who bears the risk.
Because you are in control of where your money is invested, you bear the risk of your investments, not the insurance company. Variable universal life policies have no guarantees on how much the cash value of those policies will be.
Dave considers variable universal life policies to be one of the worst life insurance options on the market due to the high administration fees. (Are you seeing a rate trend here?) Again, you’d be much better off getting a term life policy and putting your hard-earned money into mutual fund investments.
Are you ready for another confusing life insurance product that gets bogged down in investment options? Well, let us introduce you to Indexed Universal Life (IUL)! let’s see how this works, or more accurately, how it fails.
We all know and love the stock market, right? You’ve probably heard of indices like the Dow Jones Industrial Average, the S&P 500, and the Nasdaq. each of them is an index that measures how well the market (or a defined portion of the market) is doing. index funds are mutual funds that invest in the companies included in these indices.
then you can invest in an index fund that mirrors the s&p 500, for example. some investors like to use them as a safe but passive way of investing that typically leads to an average return on their investment.
how does that relate to an iul? that is how. For anyone with an indexed universal life insurance plan, there is a cash value portion and a life insurance portion with a death benefit. the cash value portion is invested in an index fund.
Now, if the market does well, the cash value will go up. great! But there’s a catch: The rate will always be a bit lower than the index fund’s return because the insurance company will take its hefty cut. yes, once again with permanent life insurance, the rates bite you where it really hurts.
What if the market is not doing well? You may be surprised to learn that the cash value portion of your IUL policy will also be reduced. And this turmoil in the markets means that sometimes you could pay a lot more for your premiums and other times, you could pay less.
other types of life insurance policies
The two main types of life insurance (term life and permanent life) are just the tip of the iceberg. Insurance companies also offer dozens of other insurance policies, each designed to pay death benefits in different ways. Here’s a brief overview of the other types of life insurance you can find when you’re shopping.
Applying for a term or lifetime policy in the past was like trying out for a sports team – you had to undergo a full physical just to get started! we are talking about blood draw, body weight and drug screening! but due to recent changes in the market, no medical exam policies and contactless exams have become the norm. top-tier companies now offer this approach at the same rates as options that require a medical exam. There are two subtypes of life insurance without a medical exam:
Joint life insurance, also called first-to-die insurance (ouch!), is a cash-value policy marketed to couples who want to share a policy with each other. Think of joint life insurance policies as the joint checking account of the life insurance world. the policy covers two people for a fee. these policies pay a death benefit as soon as the first spouse dies.
And therein lies the problem: If your finances are like most families, one spouse earns more than the other, and sometimes much more. Remember, the job of life insurance is to replace someone’s income in the event of their death. Joint life insurance takes a one-size-fits-all approach and pays the same benefit to either spouse.
That means you could be paying a lot more to secure your spouse’s part-time income from the local fabric store than if you simply bought two term life policies. a joint life policy doesn’t make much sense when you weigh the costs.
If joint life insurance policies don’t make much sense, then second-to-die or survivor life insurance policies are a complete waste of money (and doubly hard to mention). We recommend that you avoid survivor life policies altogether because a survivor life policy, which is also a type of cash value policy, does not pay any benefits to anyone until both spouses die. then, he pays his children.
survival policies are aimed primarily at wealthy individuals who want to avoid high-net-worth taxes on what they leave behind. they are not actually intended to cover your spouse at all. also, your spouse is not covered when you die. so yeah, you guessed it. As with all cash value policies, here’s the broken record message: You and your spouse are better off getting a term life policy, then investing in a good mutual fund.
At first glance, final expense insurance (or burial insurance) seems to make sense because it’s relatively inexpensive. flashy ads will suggest that you are saving your family the burden of paying for your funeral. It’s about “peace of mind” knowing your funeral expenses are covered before you die, right?
But burial insurance, which is also a type of cash value insurance, is a completely emotional purchase that makes absolutely no sense financially. Your funeral is something you can plan to pay for if you simply set aside $50 a month every month starting at age 55.
Let’s say you live to the ripe old age of 77 (the average US lifespan).1 That’s 22 years spending $50 a month or more than $13,000, and that’s assuming you don’t invest the money! if you invest it with your other savings and earn just 10% a year, you will have saved almost $50,000! Since the average cost of a funeral is around $7,000, why not save up the money to pay for your own funeral and tell the insurance company to take a walk?2
Decreasing term life insurance works like this: As you pay down your debts, your death benefit also decreases. Specific examples of this type of insurance include mortgage life insurance and credit life insurance. In these examples, the death benefit is designed to follow the amortization schedule of a mortgage or other personal loan.
Policies are advertised as a way to pay off debt or pay off your mortgage if you die. so really, it’s just making payments on your debts, and your beneficiaries don’t get the full benefits of life insurance. In other words, they potentially inherit nothing more than a paid or discharged debt, but they have no cash in their pocket. Like term life insurance, there is no cash value. therefore, the final value is zero at the end of the term.
So, let’s go back and take a look at the $500,000 term life insurance policy example we mentioned earlier and apply it to real life. If you had a decreasing term life policy and you died in the last month of the term, your family would receive zero dollars. but if they had a regular term life policy, they would receive $500,000.
So here’s the question: If life insurance is about protecting your family’s long-term financial plan, how on earth can you plan for something you don’t know the value of? That’s the problem with declining term life policies. you never know how much they’ll be worth when you die, so they provide your family with very little financial security.
An accidental death and dismemberment, or ad&d, policy is one of those policies that almost everyone has encountered at some point. the insurance agent tries to sell you an affordable policy that pays in case of accidental death or dismemberment. if he loses an arm and can’t work, he pays a portion of the benefit. if you die in an accident, it pays the full death benefit.
These policies are cheap (usually just a few dollars per paycheck), but you get what you pay for. Many ad&d policies will not pay a death benefit if you die from a medical procedure, health-related problem, or drug overdose. And as you get older, your chances of dying by accident are significantly reduced. that’s why an ads and advertising policy is not a replacement for, wait, a term life policy.
Finally, there is group life insurance. This type of life insurance is purchased by an organization or business, which explains the name “group,” and then offered as a benefit to their employees.
The best news if you’ve opted into this at work is that it’s usually free. It’s also another way to get life insurance without having to pass a medical exam. but that’s where the advantages end.
Unfortunately, the basic group life insurance death benefit is nothing big. That’s because these plans typically only cover a few times your salary. Remember, we always recommend getting a life insurance policy that provides a benefit of 10 to 12 times your annual income.
what kind of life insurance should i get?
in a word (or two): term life! it’s the only way to go if you want to be smart, save money, and truly give yourself and your loved ones peace of mind in the long run.
This is why we love term life insurance. as we said at the top:
But how much life insurance should you carry?
We recommend having a term life insurance policy that covers 10 to 12 times your annual income before taxes. (To get an idea of ​​what that number looks like for you, check out our term life calculator.)
For example, if you earn $40,000, you must have coverage of at least $400,000. why so much?
If your surviving spouse invests that $400,000 in a good mutual fund with an average return of 10-12%, you could peel $40,000 a year out of that investment to replace your income without having to cut back on the original investment amount.
keeping it simple: term life insurance makes sense
Life insurance should be simple. That’s why we recommend buying only a term life insurance policy. it’s simple, inexpensive, and designed to do one thing for the long term: support your loved ones if you die. And as an added bonus, death benefits from a term life insurance policy are almost always tax-free.
nobody wants to talk about it, but we have to. you need life insurance. When you’re gone, those you love will grieve. this is unavoidable. however, leaving them penniless is avoidable. make sure they will be financially secure no matter what.
Whether you’re looking for a new life insurance policy or just wondering if you have the right kind of life insurance, we recommend Zander Insurance from the trusted provider of Ramsey. Your insurance professionals will guide you through the process of obtaining a term life policy that fits your family’s needs. start here to get your term life insurance quotes.
