Different Kinds Of Life Insurance
By James Tobin, CFP®
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Expert Review Of Different Kinds Of Life Insurance
Jim Tobin, CFP®
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If you are actively in the market, or simply researching the different kinds of life insurance policies available, you have landed in a good place. The purpose of this article will be to decode the often confusing marketing language of the life insurance market and be a resource so you can make the best decision on how you want to protect your family.
However, before you read about the different types of life insurance , please take a quick look at this video about how to avoid the most common mistakes that life insurance buyers make. It could save you thousands of dollars over the life of your policy.
What Are The Different Kinds Of Life Insurance?
In spite of all the acronyms and marketing jargon, at root there are really two kinds of life insurance policies with lots of variants. There is either temporary coverage which is referred to as term insurance and permanent insurance which is referred to as either whole life or universal life.
Term Life Insurance
Term life insurance is available for lengths ranging from 1 year to 30 years as a general rule. At the end of the term period the insurance either expires or can be renewed annually at a vastly increased rate.
Because it is generally affordable, term insurance is the most popular life insurance available, with 20 year terms being the most commonly purchased. These products are commonly marketed as "mortgge protection insurance", however the marketing label doesn't change that the underlying product is simple term insurance.
More and more, the term life insurance market is adopting accelerated underwriting programs that do not require a medical exam as part of the application process.
You can dive deep into the ins and outs of term life insurance, learning about available term lengths, underwriting considerations, financial ratings and rates. The Life Insurance Help Desk works with the top term life insurance carriers.
Permanent Life Insurance
Permanent life insurance can be trickier than term simply because there are more variants and the labeling terms change depending on the market segment carrier is seeking to serve.
Whole Life - Senior Market
In spite of serving vastly different markets, all whole life insurance policies share the simple principal that the monthly payment will never change and that the policy will never expire. It is these clear principals that have made so called "final expense" insurance such big sellers.
Final expense is a marketing term for small face value life insurance policies? that have limited or no cash value and are marketed to seniors who want to make sure that there burial expenses are not a burden to loved ones.
Seniors, who do not qualify for simplified issue "final expense" policies due to sever health concerns, are often offered guaranteed policies. Guaranteed acceptance life insurance, is a small face value whole life policy that has a two or three year waiting period before the policy will pay the benefit. This is referred to a as a graded policy, where the policy pays out the premiums paid plus interest if the insured dies prior to the end of the waiting period.
Whole Life Insurance As An Asset Class
While the "final expense" portion of the whole life market is generally made up of face value policies of $25000 or less, the investor class uses whole life as a way to hedge against volatility in the stock market. Some of the biggest names in the life insurance market consider these cash accumulation whole life policies to be the bread and butter of their business.
The best known of the cash value whole life policy carriers are mutual companies like New York life and Northwestern Mutual. These carriers, along with several others, have a long history of paying dividends on whole life policies and allowing for policy customization that drives cash accumulation.
Cash accumulation whole life policies have premiums that are split between the cost of insurance plus marketing & administration and policy cash value that is conservatively invested by the carrier. these policies have tax advantages, loan provisions, and minimum performance guarantees. They have long been a staple of the wealthy investor class in the United States.
Universal Life Insurance
Although , more respected now, universal life insurance can be a controversial product due to a a checkered past. Universal life or UL is a form of life insurance with three "flavors" or variants; Guaranteed universal life (GUL), current assumption UL, and Indexed Universal life (IUL). Even with much in common, these products serve different market segments. Let's take a look.
Guaranteed Universal Life Insurance (GUL)
Guaranteed Universal Life is a hybrid type of life insurance policy that has elements of term insurance but is not temporary. Although, a GUL often has some cash value, the policies are not designed to accumulate cash value, but rather to provide lifetime insurance at the lowest cost available.
GUL's have a guarantee provision that provides coverage even if the cost of insurance increases beyond the current premium and value of the policy. Like term, the premium is level and the coverage is guaranteed as long as the payments are made.
Current Assumption Universal Life
Current assumption UL is the "traditional" universal life product that got several life insurance carriers into hot water in the 1980's. This UL product is designed to accumulate cash and have flexible premium outlays.
The cash build up consists of a part of the premium that is designated as savings in a side account. This money is conservatively invested by the carrier and the policy has a guaranteed interest rate of return. The inherent risk of a universal life policy is that the increased insurance costs outpaces the a growth and the policy owner is then obligated to make up the shortfall out of pocket.
The reason for the previous problems with this product was agents selling the product based on the 16% interest rates prevalent in the eighties. When interest rates came down and premiums were no longer being paid by interest growth, many policies imploded. The result was several class action law suits.This scar on the insurance industry led to reforms that limit the percentage rate that life insurance can be illustrated.
Index Universal Life Insurance (IUL)
Indexed universal life is a relatively new product that has performed quite well over the last decade and a half. The basic premise of an IUL is the same as current assumption UL accept that instead of current interest rates, the IUL is based off equity indices like the S&P500.
However, unlike the stock market, the policy does not lose money based on poor stock performance. This "magic" is performed by the carriers investing mostly in bonds and then buying & selling stock index options. the end result being that when the market is up, the policy gets a share of the upside....and when it is down, the policy breaks even (minus administrative expenses) , based on the bond income.
A primary reason that these types of policies have avoided the troubles that current assumption faced in the eighties is that these policies are also subject to the illustration reforms and cannot be illustrated at gains of more than 6.5%.
What Kinds Of Life Insurance Is No Exam?
You will constantly hear radio and television ads for "no exam" life insurance. This is just marketing for an accelerated underwriting process. All of the policy types that have been discussed here are available as no exam products.
There are many good reasons to consider using a no exam carrier, but the underlying life insurance policy types don't change as a result. If you are concerned about underwriting due to a health concern please take a look at the navigating pre-existing health conditions post.
Your Next Step
Now You Know The Different Kinds of Life Insurance Policies
So the next time you hear terms like mortgage protection life insurance, or final expense & guaranteed life insurance, you will know that these are just marketing labels. The same is true when you hear things like "investment grade" life insurance or "asset class life insurance". Lastly, you also know that "no exam" is about the underwriting process and not the policy itself.
Thank you for choosing the Life Insurance Help Desk to research the different types of life insurance policy. Please use the links for a more in depth discussion. Should you have any questions about the different kinds of life insurance you may be interested in, please do not hesitate to call or send over an email.