Types of Life Insurance Policy

Life insurance types and options

Four major types of non-variable life insurance coverage are:

• Term Life
• Whole Life
• Guarantee Universal Life
• Index Universal Life

Each of these provides a death benefit, but they can differ significantly in length of coverage, premium flexibility, accumulation and distribution of cash values, and other factors. While specific policies vary by company, these general descriptions can help you understand the basic differences.

Term Life Insurance

Term life insurance is basic coverage that generally does not build life insurance policy cash value. Consumers typically buy term life insurance to provide death benefit protection for a specific period of time.

Premiums for term coverage are usually initially lower than other types of life insurance because the policy only provides a death benefit for a defined period. Later, some term insurance policies can be extended or converted into another type of coverage.

However, if you renew or convert your coverage, your new premium will probably be higher than your previous coverage, and can continue to increase as you grow older.

One of the most commonly used policies is term life insurance. Term insurance can help protect your beneficiaries against financial loss resulting from your death; it pays the face amount of the policy, but only provides protection for a definite, but limited, amount of time. Term policies do not build cash values and the maximum term period is usually 30 years. Term policies are useful when there is a limited time needed for protection and when the dollars available for coverage are limited. The premiums for these types of policies are significantly lower than the costs for whole life. They also (initially) provide more insurance protection per dollar spent than any form of permanent policies. Unfortunately, the cost of premiums increases as the policy owner gets older and as the end of the specified term nears. (To learn more, read Buying Life Insurance: Term Vs. Permanent and What is term insurance?)

Term polices can have some variations, including, but not limited to:

Annual Renewable and Convertible Term: This policy provides protection for one year, but allows the insured to renew the policy for successive periods thereafter, but at higher premiums without having to furnish evidence of insurability. These policies may also be converted into whole life policies without any additional underwriting. 

Level Term: This policy has an initial guaranteed premium level for specified periods; the longer the guarantee, the greater the cost to the buyer (but usually still far more affordable than permanent policies). These policies may be renewed after the guarantee period, but the premiums do increase as the insured gets older. 

Decreasing Term: This policy has a level premium, but the amount of the death benefit decreases with time. This is often used in conjunction with mortgage debt protection.

Many term life insurance policies have major features that provide additional flexibility for the insured/policyholder. A renewability feature, perhaps the most important feature associated with term policies, guarantees that the insured can renew the policy for a limited number of years (ie. a term between 5 and 30 years) based on attained age. Convertibility provisions permit the policy owner to exchange a term contract for permanent coverage within a specific time frame without providing additional evidence of insurability.

Food for ThoughtMany insurance consumers only need to replace their income until they've reached retirement age, have accumulated a fair amount of wealth, or their dependents are old enough to take care of themselves. When evaluating life insurance policies for you and your family, you must carefully consider the purchase of temporary versus permanent coverage. As you have just read, there are many differences in how policies may be structured and how death benefits are determined. There are also vast differences in their pricing and in the duration of life insurance protection. 

Many consumers opt to buy term insurance as a temporary risk protection and then invest the savings (the difference between the cost of term and what they would have paid for permanent coverage) into an alternative investment, such as a brokerage account, mutual fund or retirement plan.

Whole Life Insurance

As its title indicates, whole life insurance provides a lifetime death benefit for a set premium amount and builds cash value you can use while you’re living.

The strength of a whole life insurance policy is that it provides guaranteed cash values and benefits in return for fixed premiums. A trade-off to consider is that a whole life policy may build cash value at a lower rate than alternative coverage options.Whole life insurance provides guaranteed insurance protection for the entire life of the insured, otherwise known as permanent coverage. These policies carry a "cash value" component that grows tax deferred at a contractually guaranteed amount (usually a low interest rate) until the contract is surrendered. The premiums are usually level for the life of the insured and the death benefit is guaranteed for the insured's lifetime. 

With whole life payments, part of your premium is applied toward the insurance portion of your policy, another part of your premium goes toward administrative expenses and the balance of your premium goes toward the investment, or cash, portion of your policy. The interest you accumulate through the investment portion of your policy is tax-free until you withdraw it (if that is allowed under the terms of your policy). Any withdrawal you make will typically be tax free up to your basis in the policy. Your basis is the amount of premiums you have paid into the policy minus any prior dividends paid or previous withdrawals. Any amounts withdrawn above your basis may be taxed as ordinary income. As you might expect, given their permanent protection, these policies tend to have a much higher initial premium than other types of life insurance. But, the cash build up in the policy can be used toward premium payments, provided cash is available. This is known as a participating whole life policy, which combines the benefits of permanent life insurance protection with a savings component, and provides the policy owner some additional payment flexibility. 

Guarantee Universal Life Insurance

Guarantee Universal life (GUL) insurance policies provide a death benefit as well as the opportunity to build policy cash value. This coverage is different from term and whole life insurance because, within policy limits, you can vary the amount and timing of your premiums. Typically, you can also increase or decrease your death benefit (based on your insurability). As long as you maintain sufficient policy value to keep your policy in-force, your policy’s flexibility enables you to pay premiums as your circumstances allow.

Your cash value in a GUL policy is determined by the amount of premiums you pay, the declared interest crediting set by the insurance company, and policy charges.

As a policyowner, you have more flexibility with GUL than with whole life, but you assume additional risk. GUL policies usually have fewer guarantees than whole life coverage, so you must carefully manage premium payments and any distributions taken to help ensure your policy will stay in-force. This type of life insurance policy usually offers a built-in no lapse guarantee that can last for the lifetime of the insured life or for a shorter period selected by the policyowner.

Index Universal Life Insurance

Index universal life (IUL) insurance includes the premium flexibility and adjustable death benefit that typical UL coverage provides. Plus, IUL can provide the potential for greater policy value growth than UL, with less risk to you than a Variable Universal Life policy.

IUL policies link the growth of policy value to the percentage change of one or more widely-followed financial market indices such as the S&P 500^® Index, Nasdaq-100^®, or Dow Jones Industrial Average. As a rule, IUL policies also include a fixed-rate interest crediting option.Universal life insurance, also known as flexible premium or adjustable life, is a variation of whole life insurance. Like whole life, it is also a permanent policy providing cash value benefits based on current interest rates. The feature that distinguishes this policy from its whole life cousin is that the premiums, cash values and level amount of protection can each be adjusted up or down during the contract term as the insured's needs change. Cash values earn an interest rate that is set periodically by the insurance company and is generally guaranteed not to drop below a certain level. (For related reading, see Cashing In Your Life Insurance Policy.)

Insurers offering IUL policies credit interest at rates that are linked to the percentage change of a selected index. These companies typically provide a "crediting rate zone" with a cap that represents the maximum crediting rate and a floor that represents the minimum crediting rate. Based on the percentage change in the index, interest will be credited between the cap and floor.

With IUL, your policy value can be credited with higher interest rates than whole life and UL policies typically provide. You may have greater downside protection than Variable Universal Life, but, compared to Variable Universal Life, the upside potential is more limited.

Other Insurance Policies

The list of insurance products is not limited to health, life, or property protection; in fact, there are many other risk management solutions available in other forms of insurance too. 

Specified Disease Insurance
Taking a step beyond health insurance, specified disease insurance (such as cancer insurance or Alzheimer's insurance) helps people guard against the incredible financial burdens of specific long-term diseases or conditions. These types of policies often provide a cash benefit for just about every part of the treatment regimen, from hospital confinement to treatment and drugs. Benefits are often paid directly to the policy owner. When considering this type of policy, it is important to determine the waiting period required before benefits are paid, the maximum benefits and maximum length of time benefits are payable, as well as the exact definition of the disease covered. (For related reading, see Critical Illness Insurance: Get Paid If You Get Sick.)

Professional Liability Insurance Professional liability insurance is a specialty coverage not covered under any property or homeowners endorsements. Professional liability coverage protects professionals, such as doctors, financial advisors, etc., against financial losses from lawsuits filed against them by their clients or patients. While practitioners from different professions are expected to have extensive technical knowledge and experience, mistakes might happen and they can be held responsible in a court of law for any harm they cause to another person or business. These types of policies are often called "errors and omissions" or "malpractice" policies. (To learn more, read Don't Get Sued: Five Tips To Protect Your Company, Filling The Gaps In General Liability Insurance and Cover Your Company With Liability Insurance.)

Title Insurance  

Title insurance offers protection against loss arising from problems connected to the title to your property. This is often incorporated with the home-buying process, when a formal title search is completed before a lender extends credit toward the purchase of a home. As with mortgage

insurance, it protects the lender but the borrower must pay the premium, which is a single payment, up front. You may want title insurance because it will protect you against human errors or oversights relating to the clean transfer of property titles. Consumers can choose among a variety of options, but the top three policies include owner's, lender's and extended coverage title insurance.

Credit Insurance

Credit insurance is an optional protection purchase from lenders and is often associated with mortgages, loans or credit cards. It protects the lender and the borrower on the chance that he or she is unable to repay the debt due to death, disability or involuntary unemployment. Before you consider buying this type of insurance, do your homework. It might make more sense, and may be more cost effective, to purchase life, disability or other types of coverage that do not limit you to a specific debt. (For more insight, see 15 Insurance Policies You Don't Need.)

Insurance is an integral part of any personal financial plan. The type of insurance and the amount of coverage you obtain all depends on your unique financial and family circumstances, and must be evaluated carefully. When considering purchasing coverage, you should review all the potential risks and the financial impact of these risks on your financial health. This will help you determine what options to look for and what questions to ask. What you need to keep in mind is that you do not want to be underinsured or overinsured, which means you have to do your homework before you buy. And as with any type of financial product, you must read the fine print and consult with a competent advisor. 

Let's review what we've learned:

• Insurance is a form is risk management in which the insured transfers the cost of potential loss to another entity in exchange for monetary compensation known as the premium.
• Insurance works by pooling risks. Because the number of insured individuals is so large, insurance companies can use statistical analysis to project what their actual losses will be within the given class. This allows the insurance companies to operate profitably and at the same time pay for claims that may arise.
• Underwriting is the process of evaluating the risk to be insured. This is done by the insurer when determining how likely it is that the loss will occur, how much the loss could be and then using this information to determine how much you should pay to insure against the risk.
• The insurance contract is a legal document that spells out the coverage, features, conditions and limitations of an insurance policy.
• Property and casualty insurance is insurance that protects against property losses to your business, home, or car and/or against legal liability that may result from injury or damage to the property of others. This type of insurance can protect a person or a business with an interest in the insured physical property against losses.

• An auto insurance policy typically covers you and your spouse, relatives who live in your home and other licensed drivers to whom you give permission to drive your car.
• Homeowners insurance typically covers the dwelling (the structure), personal property and contents, and some forms of personal liability. The policy may cover direct and consequential loss resulting from damage to the property itself, loss or damage to personal property, and liability for unintentional acts arising out of the non-business, non-automobile activities of the insured and members of that insured's household.
• Umbrella insurance helps you protect your assets if you are sued.If you are worried that the liability insurance coverage you have through your auto or property policies is still not enough, you can consider adding an umbrella policy.
• Health insurance is a type of insurance that pays for medical expenses in exchange for premiums. The way it works is that you pay your monthly or annual premium and the insurance policy contracts healthcare providers and hospitals to provide benefits to its members at a discounted rate.
• An indemnity plan, sometimes called a fee-for-service plan, is a type of insurance that reimburses you according to a schedule for medical expenses, regardless of who provides the service.
• The HMO is the most common type of insurance policy people own and the one most frequently provided by employers. HMOs provide a wide range of comprehensive healthcare services to a group of subscribers in return for a fixed periodic payment.
• PPOs are a group of healthcare providers that contract with an insurance company, third-party administrators, or others (like employers) to provide medical care services at a reduced fee.
• A point of service plan is a hybrid plan that combines aspects of an HMO, PPO and indemnity plan. This type of plan is more flexible in that it allows you to decide at the time you need services to elect to use the POS plan's physician to arrange in-network care (HMO feature), or to go outside the network or hospital and pay a higher portion of the cost.
• Disability insurance can replace a portion of the salary you were making before you became disabled and unable to work after a serious injury or illness.

• Disability insurance providers rate their premiums based on your job and the level of risk involved in doing that job.
• The reason to buy long term care insurance is to protect your assets in case you need to pay for assisted living, home care or a nursing home stay.
• Life insurance provides you with the opportunity to protect yourself and your family from personal risk exposures like repayment of debts after death, providing for a surviving spouse and children, fulfilling other economic goals (such as putting your kids through college), leaving a charitable legacy, paying for funeral expenses, etc.
• Whole life insurance provides guaranteed insurance protection for the entire life of the insured, otherwise known as permanent coverage. These policies carry a "cash value" component that grows tax deferred at a contractually guaranteed amount (usually a low interest rate) until the contract is surrendered.
• Universal life insurance, also known as flexible premium or adjustable life, is a variation of whole life insurance. Like whole life, it is also a permanent policy providing cash value benefits based on current interest rates.
• Variable life insurance is designed to combine the traditional protection and savings features of whole life insurance with the growth potential of investment funds. This type of policy is comprised of two distinct components: the general account and the separate account. The general account is the reserve or liability account of the insurance provider, and is not allocated to the individual policy. The separate account is comprised of various investment funds within the insurance company's portfolio, such as an equity fund, a money market fund, a bond fund, or some combination of these.

How to Shop for Term Life Insurance Quotes

Shopping for term life insurance quotes is a stressful process for most people. You must wade through the typical choices of any insurance policy against the backdrop of trying to guarantee the well-being of your family in the most tragic of circumstances. And, despite the fact that term life insurance is the most cost-effective way to protect your loved ones, trying to figure out if you need 10, 20, or 30 years of coverage adds extra uncertainty to the process. So, here's what you need to know to shop for term life insurance quotes quickly and responsibly so as to make sure you find affordable insurance and reliable protection for your loved ones.

Common Choices for Term Life Insurance Quotes

As you begin discussing policy options with your life insurance company, you'll hash out typical policy choices including payouts and coverage limits, term length, and under what conditions the policy will be paid out. Certain chronic illnesses and disabilities may be included in some term life policies and excluded in others. But in addition to these common data points, you'll likely want to consider these structural choices for your term life insurance quotes.

• Annual Renewable vs. Level Term Life Insurance: With annual renewable term life insurance, you must renew your policy each year and premiums will go up as your likelihood of death goes up. Level term life insurance sets a term length and averages the insurance risk across the entire term, allowing your premiums to stay constant year after year.


• Constant vs. Decreasing Term Life Insurance: If you expect your annual savings to eventually eliminate the need for life insurance, you may want to opt for decreasing term life insurance in which promised benefits decrease year after year and should parallel the decreasing need for financial protection. Premiums may go up or down, depending on how decreasing needs compensate for the increasing risk of death.


• End of Term Options: Perhaps the biggest danger when purchasing term life insurance is not having a plan once the insurance term expires. Some term life policies include an automatic renewal option, an important safeguard if you're diagnosed with a terminal illness but live beyond the term length. Some plans also give you the option of converting your term life insurance to a permanent or whole life insurance policy. Unless you're sure you'll be financially independent at the end of your life insurance term, you need to include a back-up plan into your life insurance policy.

Shop Online for Term Life Insurance Quotes

More and more, insurance is becoming an online industry, and the big reason is simple: It dramatically reduces the cost of finding and enrolling customers. Without an online referral service, insurance companies must rely heavily on commission-based salesman to attract new customers. These commissions can eat up 10-20% of your premiums at the very beginning of the policy term. And because life insurance uses these salesman more than most sectors of the insurance industry, shopping online for this life insurance holds the potential for greater cost savings and/or better insurance benefits. Fill out a brief online form here at NetQuote, and life insurance companies will contact you with term life insurance quotes, policy descriptions, and general information. Don't dismiss the benefit of carefully considering your options from the comfort of your own home, either.

Finding the Right Life Insurance Policy

You need life insurance, but there seem to be so many kinds--universal life insurance, variable life insurance, whole life insurance--the list can become overwhelming. Which one both fills your needs and fits your budget?

There are two basic types of life insurance: term life insurance and permanent life insurance cash value).

• Term life insurance provides coverage for a specified period of time usually between one and 30 years).


• Permanent life insurance combines a death benefit with a cash value component that builds over time like any other investment.

Within those two general categories are a number of variations.

Some examples:

• Convertible term policies will permit you to exchange a term life insurance policy for a permanent one at some point.


• Universal life insurance combines flexible premiums with an adjustable policy.


• The face value of variable life insurance varies depending upon the value of the dollar or securities or other equity products at the time payment is due.


• Whole life insurance may be kept in force for a person's entire life and pays a benefit upon his or her death.

Cash value insurance offers lifetime protection, while term insurance may be a better choice if you're buying life insurance mainly for the financial protection it offers.

If you're considering term insurance, consider choosing a term that matches your need for life insurance protection. For instance, if your main motivation is to protect your children until they're out of college, you'll want to buy a policy with a term that covers that period.

Whatever type of life insurance you decide on--whether you're buying universal life insurance, variable life insurance, or another type of life insurance--the most important principle in buying life insurance is to shop around.NetQuote will give you free quotes from insurers to help you find the right one. Your premium will depend on a number of risk factors, such as your age, your health, whether you smoke, your family health history, and the type and amount of life insurance you're buying.

And finally, make sure you understand everything in the policy. Whether you're buying universal life insurance, variable life insurance, or another type of life insurance, under the laws of your state, you may have a "free look" period during which you may cancel the policy without penalty.

See how easy it is to shop online for life insurance. Get your free life insurance quotes today!