Types of Life Insurance: Comparing Policy Options

This is an important consideration since the coverage you choose can provide not only financial protection but also significant peace of mind for years to come. Having helped consumers navigate the buying process for over two decades, we pride ourselves on making life insurance simple through education and outstanding customer service. The following article, Types of Life Insurance: Comparing Policy Options, is intended to provide an overview of the policy options available in today’s market.

The different types of life insurance available in today’s marketplace can seem overwhelming, with companies offering numerous policies, features, and benefits. However, essentially all life insurance products can be classified as either term or permanent coverage.

Term life insurance is basically designed to provide a specific amount of coverage for a certain period. While, permanent life insurance can provide coverage for an insured’s entire lifetime and accumulate cash value along the way.

Term life insurance is intended to be temporary in nature, providing coverage for a specific time frame or “term.”  There are several options when considering term life, the most popular in today’s market being level term. Information related to common term life options has been provided below.

These types of life insurance policies are best suited for those who have a short-term need for life insurance protection. Typical uses for annually renewable term may include short-term income protection, coverage required for loans, life insurance mandated by court order, and other circumstances requiring short-term coverage.

Since the premiums are based on annually renewable rates, the cost of this type of term life can be very reasonable.  However, if kept long-term, annually renewable term can become extremely expensive in later years.

The primary benefits of annually renewable term life insurance are the comparably low initial premiums and short-term coverage option. 

Likewise, the most significant negative of annually renewable term is that the premium rates are annually renewable and will become prohibitively expensive if kept long-term. 

The premiums for level term are initially more expensive than annually renewable term but remain level for the specified coverage period. Traditionally, the longer the level period, the higher the initial premium. However, these level plans usually represent significant savings over holding annually renewable term for the same time frame.

These types of life insurance policies are ideal for individuals having a need for life insurance coverage for a certain number of years. Typical uses for level term life include income replacement, mortgage protection, college planning, and other coverage needs based on different stages of life.

Level term life premiums routinely remain level for the specified period and traditionally represent a good value when compared to other life insurance options. Additionally, many level term plans are renewable and/or convertible to a permanent policy at a certain point.

The main benefit associated with level term life insurance is that premiums remain level for the selected period, representing a significant value when compared to many life insurance options. However, if kept beyond the level period, premiums for level term policies will routinely increase yearly based on annually renewable rates.

The following illustration provides sample rates for 10, 20, and 30-year level term policies on a 35-year-old male non-smoker qualifying for a Preferred Plus underwriting class.

As an example, a 30-year return of premium policy would cost less than a 15-year policy with the same death benefit based on the return of premium feature.

These types of life insurance policies are best suited for those who are willing to pay a little more in premiums over the life of their policy to receive a return of premiums paid.

Essentially, getting FREE life insurance!

As with traditional level term policies, typical uses for return of premium term include income replacement, mortgage protection, college planning, and other temporary coverage needs.

Policy premiums for this type of coverage typically remain level for the chosen period and represent a significant value since premiums are eventually returned. As with level term, many return of premium policies can be renewed and/or converted to a permanent plan subject to policy guidelines.

The primary benefit of return of premium term is quite simply the promise of a return of all premiums paid.

This policy option allows an individual to engage in “forced savings” and essentially provides FREE life insurance. However, in paying the higher premiums associated with these types of life insurance policies, opportunity costs must be considered. 

These types of life insurance policies are ideal for individuals having a need for life insurance protection that will systematically decrease over time. Typical uses for decreasing term policies include mortgage protection, coverage for personal and/or business loans, and protection for other decreasing obligations.

In the current marketplace, decreasing term policies are not as popular as they have been in years past, given the flexibility and affordability of modern level term products.

Most companies in the marketplace offer multiple term life insurance policy options. The following companies are recommended in our experience based on company ratings, underwriting standards, premium rates, customer service, and other relevant factors.

As is common with many permanent life insurance policies, whole life builds cash accumulation value through the payment of premiums and interest credited. These cash values may be accessed by the policy owner through withdrawals and/or loans. Cash accumulation value is an available living benefit associated with permanent life insurance.

Whole life policies may be either participating or non-participating depending on the insurance company. Participating policies often pay dividends to policyholders if the insurance company is sufficiently profitable. Additionally, policy dividends are normally not taxable since they are technically considered a return of premiums paid.

These types of life insurance policies are best suited for those having a long-term need for life insurance coverage and a desire for strong death benefit and premium guarantees. Many policy owners consider whole life coverage the cornerstone of their financial plan, providing long-term life insurance protection and accumulating cash value for future financial needs. Smaller whole life policies are also commonly used for final expenses or burial coverage.

The required premiums associated with whole life policies are traditionally higher than term life and many other permanent life insurance policies, but whole life plans offer substantial lifetime guarantees not available with other policies.

The primary benefits associated with whole life insurance are the exceptional guarantees provided by this type of coverage.  However, policy owners pay for these guarantees in the form of higher premiums.

Essentially, premiums and interest paid contribute to the policy’s cash value, while administrative and cost of insurance charges are deducted.

As long as these charges are covered, the policy will remain inforce. However, if adequate premiums are not paid or cash value is not available to cover expenses the policy will lapse.

The cash accumulation value within a universal life policy may be accessed by the policy owner through withdrawals and/or policy loans like other permanent life insurance policies. Based on the flexible structure of a universal life policy, excess premiums may be contributed to the cash value, subject to regulatory guidelines.

Given this feature, universal life insurance policies are often utilized to accumulate cash value to pay off mortgages, supplement retirement savings, and support other long-term financial objectives. Since cash values accessed through policy loans are not considered taxable income, this can be an extremely effective strategy.

These types of life insurance policies are best suited for those having a need for flexible life insurance coverage and a desire to accumulate cash value. 

Minimum premiums associated with universal life policies can be significantly lower than other types of permanent life insurance. However care must be taken to ensure that adequate premiums are paid to keep the policy in force.

The primary benefit of universal life insurance is the flexibility afforded the policy owner related to premiums, death benefit, cash value, and other elements of the policy.

Given this design, these types of life insurance policies are often the most cost-effective way to obtain guaranteed lifetime coverage.

Since these policies are designed primarily to provide a guaranteed lifetime death benefit at the lowest possible premiums, cash value accumulation may be minimal depending on the policy selected. It is also extremely important to ensure that the specified premiums are paid as required, otherwise the guarantee feature may be forfeited.

These types of life insurance policies are ideal for individuals who need lifetime coverage at the lowest possible price, and are not necessarily concerned with cash value accumulation. Sometimes referred to as “lifetime term,” guaranteed universal life is often used for coverage needs similar to term life such as income replacement, mortgage protection, college planning, and other obligations when the insured has long-term coverage needs.

The primary benefit associated with guaranteed universal life insurance is the ability to secure lifetime coverage at the lowest possible cost.

The following illustration provides sample premium rates for a guaranteed universal life policy on a 35-year-old male non-smoker qualifying for a Preferred Plus underwriting class.

Indexed universal life policies often have a minimum guaranteed interest rate which provides protection during market downturns.

Essentially, such policies allow policy owners to benefit indirectly from market gains while having the security of a guaranteed minimum interest rate. Like other universal life policies, these plans can be designed to provide guaranteed lifetime coverage provided sufficient premiums are paid.

These types of life insurance policies are best suited for policy owners who have a need for permanent life insurance coverage and want to participate indirectly in the upside potential of equity markets without the downside risk. The trade-off for this downside protect is the limiting percentage or cap placed on interest rates. The owner of an indexed universal life policy may not receive interest equal to market gains but is also not subject to market risks.

Given the long-term potential to accumulate significant cash values, these policies IUL policies can be a great option when supplementing retirement savings.

The primary benefit associated with indexed universal life insurance is the ability to indirectly participate in market gains without being exposed to market risk.

Variable life policies can provide a guaranteed minimum death benefit, which may potentially increase based on investment performance. Variable life policies offer fixed premiums, a guaranteed death benefit, and the ability to participate in equity investments.

These types of life insurance policies are ideal for individuals who have a long-term need for life insurance coverage with fixed premiums and a guaranteed death benefit but also want to invest directly into equity investments. However, it is important to understand that cash values in a variable life policy are subject to gains and/or losses based on the performance of the underlying investments.

As securities, these policies fall under both federal securities and state insurance laws.

Variable universal life policies provide flexible premiums, a guaranteed death benefit, and the ability to participate in equity investments.

These types of life insurance policies are best suited for policy owners who have a long-term need for life insurance coverage with flexible premiums but also want to invest directly into equity investments. As with variable life, it is important to understand that cash values in a variable universal life policy are also subject to losses based on the performance of the underlying investments.

Most companies in the marketplace offer a variety of permanent life insurance policy options. The following companies are recommended in our experience based on company ratings, underwriting standards, premium rates, customer service, and other relevant factors.