While most of us have an understanding of the term life insurance, you may be surprised to learn that there are many different types of life insurance policies available to choose from. The right type of life insurance policy for you will depend on a number of factors. These can include how long you require coverage, how much you’re willing to pay and whether you are interested in a life insurance policy which accrues cash value over time.
The two main categories of life insurance
While there are several niche policies available, all life insurance policies belong to one of two main categories:
1. Term life insurance: These policies are in place for a set number of years and are ideal for most people. If you don't pass away within the specified time frame in the policy, the policy will expire and there will be no payout.
2. Permanent life insurance: These policies last the entirety of your life and typically include a cash value component which can be withdrawn or borrowed against while you are still alive.
Other life insurance categories
There are several other common life insurance categories, each of which can be classed as term or permanent policies. Let’s take a look at some of these and how they work:
Variable life insurance
The cash value of a variable life insurance policy is linked to investments, such as mutual funds and bonds. Premiums on variable life insurance policies are usually fixed, with a guaranteed death benefit regardless of market conditions. If you’re thinking of this sort of policy, you may want to consult a financial advisor or perhaps use a retirement checklist to help better understand your finances in pensionable age.
Universal life insurance
With universal life insurance (sometimes referred to as guaranteed life insurance), death benefits are guaranteed without any change of premiums. There is usually little or zero cash value within these policies, and insurers typically demand on-time payments. You can usually set the age that you want the death benefit guaranteed.
Universal life insurance can be cheaper than whole life insurance, although missing a payment could mean your policy is forfeited. Considering there is zero cash value in the policy, you could be at risk of walking away with nothing. There are many pros and cons associated with this type of insurance, so be sure to do your research before deciding whether or not it’s right for you.
Simplified issue life insurance
For those who are unwilling to take a medical exam, instant-approval policies might be more appealing. These policies use online health questionnaires and AI algorithms to help speed up the application process. When applying, you’ll be asked a few simple health questions, although you could still be turned down based on the answers you provide.
Fully underwritten life insurance
Underwriting refers to how life insurance companies calculate the risk of insuring an individual. If you are healthy, a fully underwritten policy will usually be the cheapest option. To get the most favourable rate, it can be useful to provide as much information about yourself and your occupation as possible.
No two people are alike, so it should come as no surprise that there are different life insurance policies for different needs. If none of the above meets your criteria, it’s still worth speaking to an insurance broker, as they may be able to offer a policy that suits your lifestyle and budget.