11 Types of Life Insurance Policies

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Not that we need constant reminding, but the ugly truth is—death is inevitable. Have you asked yourself how your family would move forward after your death? Maybe not so much for the carefree young adults. But for parents and breadwinners, it’s one of their unspoken worries. In financial planning basics, getting life insurance is the way to protect your income, health, and wealth. But of the many types of life insurance policies available, which one meets your needs? 

Just the Nuggets

  • Life insurance works like a subscription plan—pay the premiums and you get to enjoy the benefits. 
  • There are two kinds of benefits in any life insurance plan: death benefits—lump sum amount or annuities to your beneficiaries once you die, and living benefits—financial aid that’ll substitute your income while you are unable to make a living.
  • Two categories of life insurance policies are term life insurance and permanent life insurance.
  • Term life insurance policies are only payable and in-force for a definite period—could be in 1 year and up to 30 years.
  • Permanent life insurance policies are payable and in-force until you die as long as premiums are paid. These are investment-linked products with a fund value that has a fixed or great potential in the rate of return.

Life Insurance Overview

As covered in Introduction to Insurance—like other types of insurance, life insurance works like a subscription plan. Think of your subscription fee—in this case, premiums—as a small expense in exchange for the guaranteed benefits. 

There are some types of life insurance policies that are investment-linked, wherein part of your premiums are invested in stocks or bonds. But don’t confuse life insurance as a savings strategy. It is a risk management strategy against uncertainties like dreaded diseases, accidents, disabilities, old age, death, or any occurrence that may stop you from earning an income. 

Life Insurance Benefits

Any insurance plan consists of coverage of financial benefits you prefer not to claim, but having one keeps you prepared anyway. Well, what makes these benefits worth paying for, in some cases, for a lifetime?

Death Benefits

The benefits of life insurance policies are more for your loved ones than for yourself. As most insurance agents would say, buying a life insurance policy is the most selfless act you can do for your loved ones. Parents and breadwinners are secured that when they die anytime, they know their families are financially well-taken care of.

Depending on your policy, insurers will give a lump sum amount or annuities to your beneficiaries once you die. For investment-linked insurance, the fund or cash value may also be given. These could range from several thousand dollars to millions. Unlike estate taxes, death benefits from life insurance are tax-deferred and will be given to your family soonest.

Living Benefits

For other unfortunate situations (i.e. accidents and dreaded diseases) that are less depressing than death, life insurance policies may also cover living benefits for the life insured. This may include supplement riders like accidental death and dismemberment, disability, critical illnesses, and hospitalization benefits. These benefits will substitute your income while you are unable to make a living.

Life Insurance Vocabulary

So far, you may have encountered technical terms that will be used frequently by insurance companies, insurance agents, or anyone in the insurance industry. So might as well get to know their definitions.

Accelerated BenefitsA portion of your death benefit is claimed in advance for your living benefits (e.g. diagnosed with a terminal illness)
Accidental Death & Dismemberment RiderAdditional benefit paid out to your family if you died from an accident, or financial aid for hospitalization when a loss of limb occurs. For dismemberment benefit, a percentage from the sum assured (depending on which body part is involved) will be provided.
Account ValueAccumulated allocations plus compounded interest from stocks and bonds investments depending on the market performance. It is partially withdrawable for whatever purpose you see fit.
Administration FeesCosts incurred for maintaining the policy, like accounting and recordkeeping. This is deducted from the fund value monthly.
Aggregate AmountThe maximum limit of benefits payable upon single or multiple claims during the policy life.
Annual RenewabilityThe coverage of some term life insurance policies can be renewed for the next year as long as premiums are continually paid.
Attending Physician StatementA medical report by the life insured’s doctor or physician. This could be an additional requirement in the underwriting process especially if health declarations were made.
BeneficiaryPersons or institutions with insurable interest who will receive the death benefits.
Cash ValueSame as Account Value
Cash Surrender ValueThe money received (less all applicable charges) should you decide to stop or cancel the policy and liquidate your account value.
ClaimWhen requirements are submitted as proof to be eligible for the use of benefits
Contestability PeriodThe period, usually up to 2 years from the policy inception, where the insurer can investigate, review, and deny claims
Cooling-Off PeriodThe immediate period, usually 10 to 30 days after policy inception, where the life insured can cancel the policy without any charges or penalty. The initial premium paid will be refunded. Also called a free-look period.
Critical Illness RiderFinancial benefits upon diagnosis or surgery of serious illnesses like cancer, heart diseases, complications related to diabetes, and many more. Insurers will provide a list of the critical illnesses they cover.
Disability RiderWhen the life insured becomes disabled, a financial benefit will be provided by the insurer. Check the definitions of a disabled person. Usually, a person is considered disabled if life insured needs assistance in daily activities (e.g. feeding, toileting, changing clothes, mobility) for at least 6 months.
Evidence of InsurabilityFinancial proof that the coverage of benefits is proportional to the life insured’s current income. The underwriting process must ensure that the amount of your policy is reasonable enough as an income replacement.
Face AmountThe worth of your policy’s coverage of benefits.
Free-look PeriodSame as Cooling-off Period
Fund Management FeesThe fund managers’ management fees for your investment-linked insurance policy.
Fund ValueSame as Account Value
Grace PeriodAn extended period after the premium’s due date where the policy remains in force even when payments are not paid on time.
Insurable InterestWhen beneficiaries will experience financial burden upon the death of the life insured.
InsurerThe insurance company that you signed the policy with. They will provide the benefits once claims are approved.
Investment Risk ProfileClassification of the policyholder’s risk tolerance when it comes to investments.
Investment-linked InsuranceA life insurance product-option that combines insurance and investment in one policy.
LapsedWhen premiums are not paid beyond the grace period, the policy will lapse. This also applies when the account value is not enough to shoulder the premiums and policy charges. All benefits will be gone.
Life InsuredThe person insured with the living and death benefits.
Modal PremiumThe frequency of how premiums are paid—monthly, semiannually, quarterly, and annually.
Permanent InsuranceA type of insurance policy that is effective and payable for a lifetime.
PolicyLife insurance contract
Policy DebtWhen the policyholder could not pay the premiums, the policy will still be in force if the account value is sufficient enough to hold policy debt. When premiums and policy charges will be deducted from the account value.
Policy FeeSame with Administration Fees
PolicyholderThe person who pays for the premiums.
Policy InceptionEffective date when the policy has been approved by the underwriters.
Policy in-forceWhen premiums are regularly paid and benefits are guaranteed.
Policy LifeThe duration of the policy’s contract. For term insurance, it could run from 1 to 30 years. For permanent insurance, the policy life is lifetime.
PolicyownerSame as Policyholder.
Pre-existing ConditionHealth conditions for which the life insured has been investigated, diagnosed, or treated before the insurance policy application.
PremiumRegular payments made to the insurer to make sure the policy is in force.
Premium HolidayA period where the policyholder can stop paying premiums and the policy is still in force as long as the account value is sufficient enough to cover policy debt.
ReinstatementThe process of activating a lapsed life insurance policy.
RiderSupplemental benefits added to the core death benefits of a life insurance policy.
Risk AppetiteDepending on the Investment Risk Profile, the personality of the policyholder when it comes to investments could be conservative, moderate, or aggressive.
Risk ClassCategories grouped by insurers based on risks in health and lifestyle as a result of the underwriting process.
Sum AssuredThe basic cover of the guaranteed death benefits.
Surrender ChargesFees incurred when the policyholder cancels the policy or withdraws too early from the account value.
Term InsuranceA type of life insurance policy that is payable by a definite period—usually 1 up to 30 years.
Top-upsAdditional allocations for investments apart from the premiums.
UnderwritingThe process of reviewing, assessing, and evaluating the assumed risks based on the life insured’s age, medical history, occupation, lifestyle, family background, and income information.
Waiver of Premium RiderWhen future premiums are no longer payable but the policy is still in force. This may happen if the life insured is disabled or diagnosed with a terminal illness.

Different Types of Life Insurance Policies

There is no one-size-fits-all life insurance policy. A lot of varieties are available, but in summary, there are two categories of life insurance policies: term life insurance and permanent life insurance.

Term Life Insurance

Policies are only payable and in-force for a definite period—could be in 1 or 30 years. You simply pay the premiums for a span of the agreed term, and any eligible claims within that period will be honored. It is usually referred to as traditional insurance because there aren’t a lot of complexities in how it works. The sum assured is also higher in amount, but adding living benefit riders is costly although possible. 

Term life insurance is cheaper because the policy does not need a lot of maintenance. Hence, minimal policy fees are already incorporated into the premiums. According to Policy Genius, the average monthly premium of term life insurance policies is around $25 to $35. 

Types of Term Insurance Policies and Their Features

1. Annual Renewable

Policies renew yearly as long as you continue paying the premiums. Premiums are priced based on the risks of the life insured dying within that year, which is less probable, that’s why it comes cheap. However, expect the premiums to increase every year.

Some can be renewed automatically while others have to go through the underwriting process again. If you’re going to choose annual renewable policies, make sure they have the automatic annual renewability feature.

2. Level Term

Premiums and benefits for this policy are fixed for a term—usually from 10 to 30 years. Premiums are fixed throughout the term, albeit, more expensive than an annual renewable term. Compared to annual renewable policies, level terms are more sustainable in the long-term. You also have the option to convert to a permanent life insurance policy.

3. Return of Premium

You might ask—what if you outlive the term of your insurance, is it money lost? Technically, yes, but not all. All of the paid premiums will be returned when the policy expires if you add a return of premium rider to a basic term insurance policy. It’s like a money-back guarantee feature but one main caveat is paying expensive premiums—about 30% more than that of a level term, according to Policy Genius.

It may not be obvious at first glance, but you’re losing a decade’s value of money. The worth of $100-premium today won’t be the same 30 years after because of inflation. It would probably be better if you get investment-linked insurance or adapt a buy term invest the difference (BTID) strategy. Nevertheless, it may not be the best option, but it’s better than losing all the money. 

4. Mortgage

The special type that pays off your outstanding long-term mortgage debt in case you die is called the mortgage protection insurance or mortgage redemption insurance. Rather than passing on your mortgage debt to your family after your passing, it’s wise to let an insurer take care of it.

Unlike the previous term types, the beneficiary of the policy is the mortgage company, such that the death benefits bypass the family and straight to the lender. The death benefits are also decreasing for a level premium as it should also match the decreasing mortgage debt as time goes on. You can opt to add a return on premium rider for a money-back guarantee feature or a waiver of premium due to disability, in case you become permanently disabled and incapable of earning an income.

5. No Medical

You can skip the medical exam through a process called accelerated underwriting. Instead of seeing a physician, insurers will rely on the life insured’s history conveniently done through a phone interview. All of the facts provided will be investigated and will be the sole basis for the policy’s approval. The coverage and premiums are comparable to that of the annual and level term types. The process will only take as short as two days. 

For more information, read the Policy Genius’ article.

6. Employer-Sponsored Group Term

If you have a generous employer who’ll subsidize your life insurance premiums as one of their work benefits, then by all means take advantage of their perks. Group term insurance can only be availed by employers who have a large group of individuals to be covered. As an employee, you don’t have much say on the coverage of your death and living benefits as this would be predetermined by the company. It’s best to check with the company’s HR department for the specific policy details and eligibility.

This is a common first basic insurance coverage for young working adults. However, once you disassociate yourself from your current employer, your sponsored term insurance policy will also dissolve. It’s better than being not insured at all. But it’s recommended to get individual insurance on your own.

Permanent Life Insurance

In the first few years of your policy life, the bulk of your insurance and the agent’s commission fees will be paid for. For the remaining years, the majority of your premiums will be allocated in different securities of your choice into your fund value which serves as forced savings.

This is suitable for people seeking income protection while at the same time, building an investment portfolio managed by a financial expert. That’s why permanent life insurance is more expensive than term insurance because of the policy fees. Although, adding some riders will not affect the premiums as much as in term life.

Types of Permanent Insurance Policies and Their Features

1. Whole Life

This simplest policy type of permanent life insurance does not expire. Your benefits are fixed for a level premium paid regularly throughout a lifetime. Aside from the guaranteed benefits, your fund value also gets a guaranteed rate of return from the dividends. The reliable predictability of the whole life insurance is what attracts most people who prefer permanent types over the term.

As one of the downsides, the premiums for whole life insurance are significantly more expensive than term life insurance by about 5 to 15 times, according to Policy Genius. Risks are far greater for a longer term of coverage, and more fees shall be incurred in maintaining the fund value.

2. Universal Life

This policy type gives flexibility to the guaranteed benefits of the whole life insurance policy. Whereas the whole life has a fixed premium and death benefit, you can adjust these amounts in a universal life policy. Do note that there is still a minimum premium that you have to pay from your pocket or deducted from the fund value to keep the policy in force.

The fund value of a universal life policy has a minimum rate of return. But depending on the market performance of your investments, this rate of return could potentially be higher. When it does, you can choose to pay lower premiums since your accrued interest can compensate for the cost of insurance and policy fees. 

3. Variable Life

This type of policy offers flexibility in the investment component of the whole life insurance plan. Whereas the whole life insurance plan has a fund value that guarantees the policyholder a fixed rate of return, variable life policies can opt for a higher but unguaranteed rate of return. Depending on the available fund options offered by the insurer, you can choose riskier securities such as stocks or equities.

Communicate closely with your insurance agent since the mechanism is quite confusing for those who are not privy to the industry. But to gain a simple understanding, the fund value gains interest over time from investments managed for you by the insurer. When gains are large enough, it can shoulder your premium payments. In that case, you can take a premium holiday. This is a double-edged sword though because the rate of return is not guaranteed. When market performance is down (like in the COVID-19 pandemic crisis), the interest earned may not be enough to sustain policy debt.

4. Variable Universal Life

The variable universal life policy, as the name suggests, is a combination of universal life’s varying premiums and death benefits and variable life’s higher potential in the fund value’s rate of return.

It’s cheaper than getting a whole life policy, but the complexities of how to keep the policy in-force may overwhelm a layman. To be on the safe side, just keep paying the premiums whenever possible. This will not only increase your fund value, you’ll also be certain that your policy won’t lapse. When emergencies happen in your life, you’ll have more room to adapt compared to the rest of the life insurance policies out there.

5. Final Expense

In the US, the average funeral cost is $7,360 while a full cremation service is around $6,000, according to Choice Mutual. Good thing some insurers offer a special type of permanent life insurance policy called the final expense life insurance.

There are two ways to do this: through the simplified issue life insurance and the guaranteed issue life insurance. Both ways cover risky individuals who are otherwise denied in term or basic permanent life.

  • Simplified issue life insurance – No medical exam is required, but a detailed medical questionnaire must be accomplished.
  • Guaranteed issue life insurance – No medical exam and medical questionnaire are required.

The Best Insurance Policy For You

The tables below show the generalized comparison of policy features among the different types of life insurance policies.

Annual Renewable1 year++YESNONot applicableTax-deferred
Level Term~10 to 30 years+++YESNONot applicableTax-deferred
Return of Premium~10 to 30 years++++YESNONot applicableTax-deferred
Mortgage5, 10, 15, or 30 years+++++YESNONot applicableTax-deferred
No MedicalUp to 30 years+++YESNONot applicableTax-deferred
Employer-Sponsored Group TermDepends on your employer’s terms and conditions+!YESNONot applicableSometimes taxable
Whole LifeWhole life$$YESYESFund value increases at a guaranteed fixed rate.Tax-deferred
Universal LifeWhole life$YESYESFund value has a minimum rate of return, but there’s higher potential depending on market performance.Tax-deferred
Variable LifeWhole life$YESYESRiskier investments could have a greater return potentialTax-deferred
Variable Universal LifeWhole life$YESYESRiskier investments could have a greater return potentialTax-deferred
Final ExpenseWhole life$$$YESYESA special kind of whole-life insurance for funeral expenses.Tax-deferred
Permanent life insurance policies are more expensive ($ is greater than +) than term life insurance policies. Within the same category, the degree of premium cost is represented with + and $ for cheaper premiums, and +++ and $$$ for more expensive premiums.

So which policy is the right one for you? 

Use the guide table below to streamline which life insurance policy is the best fit for you. These are just recommended guidelines. It’s best to talk to an insurance agent to get a customized life insurance plan for you.

Annual RenewablePeople who want the cheapest life insurance at the moment
People who need temporary coverage
Level TermPeople who want to be covered while they still have dependents. After 30 years, when their kids could live off their own, they won’t need to own a policy anymore.
People who want to eventually convert to a permanent life insurance policy when the budget becomes more flexible in the future
Return of PremiumPeople who prefer a level term policy with a money-back guarantee feature
People who want a savings component—like owning an old-school piggy bank you can break open after 20 years.
MortgagePeople who have a long-term mortgage debt
No MedicalPeople who need insurance as soon as possible with clean medical and financial records
Employer-Sponsored Group TermEmployed individuals
Whole LifePeople who prefer a fund value for future major expenses
People who prefer the simplest framework type of permanent life insurance
Conservative investors
Universal LifePeople who prefer a whole life policy but income is still unstable
Conservative investors
Variable LifeRisk-averse people who prefer higher potential in the fund value’s rate of return
Moderate to aggressive investors
Variable Universal LifePeople who want flexible premiums and prefer to invest in stocks or equities
Moderate to aggressive investors
Final ExpenseRetired or older people who do not have dependents anymore but still have to worry about funeral expenses

Closing Notes

At the end of the day, the best life insurance policy for you is the one in-force during the event of your death. Otherwise, the purpose of getting life insurance is forfeited. 

Our References and Further Readings

Nupur Gambhir & Amanda Shih. (2020). Term Life Insurance. Retrieved on 24-November-2020.

Policygenius Staff. (n.d.). Return of Premium Life Insurance. Retrieved on 24-November-2020.

Brian Greenberg. (n.d.). What Is Buy Term And Invest The Difference (BTID)?. Retrieved on 25-November-2020.

Nupur Gambhir. (2020). No Medical Exam Life Insurance. Retrieved on 25-November-2020.

Nupur Gambhir & Rebecca Shoenthal. (2020). Understanding the Cost of Life Insurance. Retrieved on 26-November-2020.
Anthony Martin. (2020). Average Funeral Costs: A Pricing Breakdown Of Funeral Expenses (Cremations, Burials, and Services). Retrieved on 26-November-2020.

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