Different Types of Life Insurance 

If you hear that tiny voice on the inside that whispers to you throughout life telling you that "you need to get life insurance," it's time to take it seriously and explore your options. With so many choices available, it's essential to understand the different types of life insurance and determine which one best suits your needs. You'll need to make two significant decisions immediately: what type of life insurance is right for you and how much coverage you require. As you browse various life insurance options and quotes, you'll eventually find a type and coverage amount that fits your budget. To help you get started, here's a brief overview of the different types of life insurance and what you need to know about each one.

Here are the different types you may encounter.

• Term life insurance
• Whole life insurance
• Universal life insurance
• Burial insurance
• Variable life insurance
• Survivorship life insurance/joint life insurance
• Mortgage life insurance

To understand how they work, let us start with the basic.

Term Life

How it works: Term life insurance has a specific end date for the level term period when rates stay the same. After this period, you can renew the policy, but at higher rates each year. Choices of coverage lengths are generally 5, 10, 15, 25, or 30 years. Usually, Term Life policies are the cheapest simply because they provide limited coverage for a limited time, and the insured can live beyond that time frame rendering the policy worthless. 

Here are some facts.

• Policy length: generally ends in 5, 10, 15, 20, or 30 years
• Cash value: they do not have any cash values
• Premiums: Stays the same until the end of the term
• Death benefit: Fixed at your face amount
• May Renew after expiration: with higher premiums every year

So Why Buy Term Insurance: If you need life insurance coverage for a specific debt or situation, term life insurance may be your ideal option. It can be purchased to cover your working years and replace your income for your family in case of your untimely demise. Alternatively, it can be used as a hedge to cover the years of a mortgage or other significant debt. This type of insurance provides a meaningful amount of coverage for a reasonable price. People with risky occupations, substantial unpaid home loans, and who are the primary earners for their families generally benefit from such policies.

Drawback

One potential drawback of a level term life insurance policy is that once the coverage period ends, the renewal rates may become too expensive for some individuals. Additionally, purchasing a new life insurance policy, later on could be costly depending on factors such as age and any pre-existing health conditions.

Whole life insurance

How it works: Whole life insurance offers coverage for your entire life, with built-in guarantees that the premium won't increase, the death benefit will remain the same, and the cash value will earn a fixed rate of return. Your premium payments go towards building a cash value account that accumulates interest over time.

Here are some facts.

• Policy length: Permanent
• Cash value: Yes
• Premiums: Stay the same
• Death benefit: Fixed at your face amount
• Limited Pay Option: Yes, some are still available

Why buy whole life:  Whole Life insurance is ideal for individuals seeking lifelong coverage and willing to pay for the added security offered by this type of policy. Some companies provide whole-life policies that you pay for a limited time but have a higher premium. Once you have hit the expiration of the payment date, you pay no more payments and are fully covered.

Drawback: Whole life insurance is undeniably more expensive than other options due to its guaranteed features.

Universal Life

How it works: Universal life insurance (UL) can be difficult to comprehend because of the various features available in different types. Although UL policies are typically less expensive than whole life insurance, they offer another degree of assurance. Some forms of UL provide flexible premium payments and alterations to the death benefit amount within certain constraints. Moreover, UL policies frequently come with a cash value component that can be depleted over time.

Here are some facts.

• Cash value: Yes
• Premiums: May change - can go up or down
• Policy length: Permanent
• Death benefit: May change

So Why Buy Universal Life: Universal life insurance could be a good choice if you want coverage for your entire life. Certain types of universal life insurance can benefit those wishing to have cash value gains connected to the stock market. However, it's important to remember that the higher the potential rewards, the higher the risks involved.

Drawbacks: If your top priority is cash value, not all UL policies will ensure you gain profits. Additionally, if you prefer flexible premium payments, monitoring your policy's status is necessary to avoid the depletion of your cash value due to fees, which could lead to a lapse in your policy. Comprehending what is guaranteed and what is not in a UL policy is crucial.

Burial Insurance

Here's how it works: You might come across policies called burial, funeral, or final expense insurance. They are small life insurance policies designed to cover funeral and other end-of-life expenses. These policies are often offered without needing a medical exam and are guaranteed acceptance.

Here are some facts.

• Policy length: Permanent
• Cash value: Yes, typically
• Premiums: Stay the same
• Death benefit: Fixed at your face amount

So Why Buy Burial Insurance: These policies are intended for people who are in poor health and cannot qualify for other life insurance plans. Insurance companies created burial policies specifically to cover the expenses related to funerals.

Drawbacks: When considering burial insurance policies, it's important to remember that the cost can vary depending on the coverage you receive. Additionally, these policies may have a "graded death benefit" clause, which means that if you pass away within two or three years of purchasing the policy, your beneficiaries may not receive the full death benefit. Instead, they may only receive a refund of your premiums plus some interest. Check the policy's timeline for these graded death benefits to ensure you understand all policy aspects.

Variable Life Insurance

How it works: With variable life insurance, you get lifelong protection and a cash value component. You have the flexibility to choose the sub-accounts where you want to invest your premiums, which will determine the growth of your cash value account. These sub-accounts invest your premiums in underlying portfolios that may include stocks, bonds, or money market instruments. Keep in mind that the performance of your chosen sub-accounts can also result in potential losses.

So Why Buy Variable Life Insurance: Investors looking for lifelong coverage through variable life insurance must be willing to take on some risk. The returns on these investments can be substantial, but they depend on the underlying investments' success. It is crucial for policyholders to actively participate in managing their assets to maximize their returns.

Here are some facts:

• Policy length: Permanent
• Cash value: Yes
• Premiums: Level
• Death benefit: Might fluctuate

Drawbacks: Choosing the wrong investments can result in a loss on your death benefit and cash value.

Survivorship Life Insurance

How it works: Survivorship life insurance policies cover two individuals, usually a married couple, under one policy. The payout to beneficiaries will transpire only when both individuals pass away. This type of policy can be more affordable than purchasing two separate policies, particularly if one of the individuals has health concerns.

Here are some facts:

• Policy length: Permanent, typically
• Cash value: Yes, typically
• Premiums: Varies
• Death benefit: Paid out after the second person dies

So Why Buy Survivorship Policy: Survivorship policies are helpful in estate planning when the beneficiary does not need the life insurance payout until both insured parties have died. This policy can help finance a trust or provide funds for estate taxes for high-net-worth couples. A couple can also use it to make a charitable donation.

Drawback: If you and your spouse are both covered by this insurance plan and one of you would face financial difficulties if the other were to pass away, this policy may not suit you. The surviving spouse will not receive any life insurance benefits, as the payout will only occur upon the death of both policyholders.

Mortgage Life Insurance

How it works: Mortgage life insurance is designed to cover only the remaining balance of a mortgage. It is different from other life insurance policies in two ways. First, if the policyholder passes, the insurance payout is made directly to the mortgage lender and not to any surviving family members. Second, the payout amount depends on the remaining balance of the mortgage or a portion of it, depending on what the policy covers.

Here are some facts:

• Policy length: Life of the mortgage
• Cash value: No
• Premiums: May fluctuate
• Death benefit: Declining death benefit as you pay down a mortgage

So Why Buy Mortgage Insurance: If you're concerned about your family's ability to pay off your mortgage after you pass away, mortgage life insurance may be a helpful solution. It's also a good option for anyone who wants to skip a medical exam when applying for life insurance.

Drawback: This type of policy won't provide financial flexibility for your family. 

Advice: If you need life insurance to cover your mortgage or other debts, opting for term life insurance is best. This type of insurance allows you to select the length and amount of coverage, offering more than just mortgage payment protection for your family. With a payout from term life insurance, your loved ones can likely pay off the mortgage, and additional funds may money used for any purpose they see fit.