The Top Tier Life Insurance Guide for 2023
Types of Life Insurance
Term and whole are the two main types of life insurance, but there are a few other options to consider before buying a policy.
- Term Life Insurance
- Whole Life Insurance
- Universal Life Insurance
- Variable Life Insurance
- Group Life Insurance
- What type of life insurance is best for you?
Shopping for life insurance can seem overwhelming, but deciding which type of policy you need is actually simple. There are only two main policy categories to choose from: term life insurance and permanent life insurance. Term life insurance (the most popular type of life insurance) lasts for a specific amount of time, while whole life insurance (the most popular type of permanent coverage) lasts your entire life.
Once you decide between term and permanent coverage, you’re already halfway to the finish line. We’ll explain the differences between the two, as well as the term and permanent life insurance options available so you can choose the one that suits you best.
Term life insurance
Term life insurance lasts for a set number of years before it expires. You pay premiums toward the policy, and if you die during the term, the insurance company pays a set amount of money, known as the death benefit, to your designated beneficiary. The death benefit can be paid out as a lump sum or an annuity. Most people choose to receive the death benefit as a lump sum to avoid taxes.
Pro: affordability. Term life insurance policies are less expensive than other types of life insurance policies and generally have lower premium costs.
Con: length. Term life insurance has an expiration date, which can align with a mortgage or when your children graduate college. Those looking for lifelong coverage should opt for permanent life insurance instead.
Who it’s for: most life insurance shoppers. Those looking for cheaper life insurance for up to 30 years should buy term life insurance.
Whole life insurance
Whole life insurance is the most popular type of permanent life insurance. It also pays out a death benefit, but unlike term life, most policies have a cash value, an investment-like, tax-deferred savings account, included in the policy.
Pro: cash value & lifelong coverage. The cash value component can cover endowments or estate plans. And since this coverage lasts for your entire life, it can help support long-term dependents such as children with disabilities.
Con: cost & complexity. A whole life insurance policy can cost five to 15 times more than a term life policy for the same death benefit amount. The cash value component makes whole life more complex than term life because of fees, taxes, interest, and other stipulations.
Who it’s for: younger buyers who can pay more. People who anticipate lifelong dependents or a need for permanent insurance with minimal complexities can benefit from whole life.
Universal life insurance
There are three types of universal life insurance (UL): indexed universal life insurance (IUL), guaranteed universal life insurance (GUL), and variable universal life insurance (VUL). All have a cash value, just like a whole life insurance policy. Your premiums go toward both the cash value and the death benefit.
Unlike whole life insurance, universal life insurance allows you to decrease (or increase) how much you pay toward premiums (flexible premiums) and allows for adjustable death benefits. If you decrease how much you spend on premiums, the difference is withdrawn from your policy’s cash value.
Indexed universal life insurance
Indexed universal life insurance (IUL) is the most popular type of UL. The cash value account has a minimum (and maximum) guaranteed interest rate based on a stock market index (like the S&P 500), chosen by the insurer.
Pro: cash value gains. There’s potential for bigger gains in the cash value account compared to other permanent life insurance policies, depending on stock market performance.
Con: investment caps. Most insurers set limits on cash value gains. You won’t lose your base cash value, but dedicated investment accounts offer higher returns.
Who it’s for: portfolio enhancers. If you’ve maxed out other investment accounts or are looking for a relatively safe investment with guaranteed minimum values, IUL might be right for you.
Guaranteed universal life insurance
Guaranteed universal life insurance (GUL) is universal life insurance without the market risk. Your premiums stay the same regardless of how market indexes perform, as your plan’s interest rates are baked into the premiums when you sign up for the policy. This type of life insurance has a “no-lapse” guarantee, meaning that as long as you pay your premiums, you’ll have coverage.
Pro: stability. Guaranteed universal life insurance provides lifelong coverage without the market fluctuations of indexed or variable policies.
Con: no cash guarantee. Unlike some permanent life insurance, GUL doesn’t allow for premium payments from the cash value account. If you skip a premium payment, your policy will lapse.
Who it’s for: risk-averse people with permanent insurance needs. Guaranteed universal life insurance is a relatively affordable permanent option, sort of like a term life insurance policy where the term lasts the rest of your life.
Variable universal life insurance
Variable universal life insurance (VUL) has a variable interest rate set by the life insurance company. Cash value is invested in mutual funds that can increase or decrease. It shares elements from universal and variable life insurance policies.
Pro: cash value gains. There’s a potential to see bigger gains in the cash value account compared to other permanent life insurance policies, depending on your investment choices.
Con: too hands-on. The policyholder, not the insurance company, manages the investment portfolio. Unlike other types of permanent insurance, you’ll need to manage your own cash value investments or work with your own financial advisor.
Who it’s for: DIY investors. There’s a big potential upside for policyholders who don’t mind being involved in money management.
Variable life insurance
The money paid into a variable life insurance cash value goes into a series of mutual fund-like sub-accounts where you can get some decent growth, but you can also lose money depending on the market. This type of policy’s cash value is more akin to investing.
While this makes variable life insurance policies a better investment option than whole life insurance policies — with potential for higher, tax-deferred growth — you can only invest in the sub-accounts available through your policy. All of this makes a variable life insurance policy both a limited investment option and a limited coverage option.
Pro: savings potential. Similar to variable universal life insurance, policyholders can see greater cash value gains with this type of policy than other permanent products.
Con: high risk for policy lapse. Both the cash value and death benefit can fluctuate based on your portfolio's performance.
Who it's for: hands-on investors who don't mind risk. For those who want to take control of their own investment portfolio, there's potential for cash gains.
Group life insurance policies
Group life insurance is an employee benefit provided by some employers that is a type of term life insurance called annual renewable term. It isn’t technically a type of life insurance, but it’s important to know how it's different from privately purchased life insurance.
Most people think their employer-sponsored life insurance is enough coverage when in most cases it isn’t. Make no mistake: If your employer is offering life insurance at no extra cost to you, it’s a great benefit. By all means, get insured. But if you need life insurance to protect your family, employer-provided coverage usually isn’t sufficient.
What type of life insurance is best for you?
Term life insurance policies are usually the best solution for people who need affordable life insurance for a specific period in their life. Permanent life insurance policies, including whole life insurance, are best for people who can pay more and want life insurance that will never expire.
Simplified issue and guaranteed issue life insurance are options for people who might not be able to get insured otherwise because of age or poor health and elderly consumers who don’t want to burden their families with burial costs.
You should always speak to a licensed independent broker, like BlueVest, or a financial advisor to determine the best insurance company and policy for you. They can help you weigh the pros and cons of each type of coverage and buy the right type of insurance for your needs.
