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10 Types of Life Insurance for Families


Life insurance isn’t a one-size-fits-all financial solution. There are several types of life insurance, and choosing the right policy depends on your unique financial goals. In this article, we explain the different types of life insurance, weigh the pros and cons of each, and help you narrow down which types of life insurance are best for you and your family.

10 Most Common Types of Life Insurance

  1. Term Life Insurance
  2. Whole Life Insurance
  3. Universal Life Insurance
  4. Guaranteed Universal Life Insurance
  5. Indexed Universal Life Insurance
  6. Variable Universal Life Insurance
  7. Variable Life Insurance
  8. Final-Expense Insurance
  9. Group Life Insurance
  10. Joint Life Insurance

Term Life Insurance

Overview: Term life insurance provides the policyholder with coverage for a predetermined term, usually in 5- or 10-year increments. The most common term life insurance policies are 20- or 30-year policies. If you pass away during the term, your insurance company will pay a death benefit to your beneficiary. If you outlive the term, coverage ends, and typically neither you nor your beneficiaries will receive any payout or return of premium payments. 

Pros: Of all the types of life insurance, term policies tend to be the least expensive. They are easy to set up, and some fall under the category of simplified-issue or guaranteed-issue, meaning you may not have to take a medical exam or even answer a detailed medical questionnaire to receive coverage. Term insurance is often sufficient for young families looking for financial protection while their children are growing and can help offset outstanding debts like student loans, credit card debt, or a mortgage.

Cons: The pay-out rate on term life insurance policies is relatively low because the majority of policyholders outlive their terms. This is why premiums are so inexpensive. If you outlive your term and need additional insurance, you may end up paying much higher premiums due to increasing age and/or declining health. Term life insurance has no cash value and does not earn interest or dividends.

Duration: A predetermined term (usually 20 or 30 years but can be as little as 1 year).

Premiums: Typically remain level for the duration of the term, but may vary by policy. Once insurance term ends, purchasing the same face value often results in higher premiums due to increasing age and/or changes to health.

Guarantees: Only guaranteed to pay out a death benefit if the policyholder passes away during the term for which they’re insured. 

Whole Life Insurance

Overview: Whole life insurance guarantees coverage for life, provided insurance premiums are paid. This means a guaranteed death benefit. In addition to the death benefit, the policy includes a built-in savings component called cash value. When you pay an insurance premium, part of it goes toward the death benefit and part goes toward growing your cash value. You also earn a guaranteed rate of return and may earn dividends if your policy is underwritten by a mutual insurance company. You can use the cash value in your policy by withdrawing it or taking policy loans against it, which allow you to use your interest and dividends tax-free. 

Pros: When it comes to living benefits, it’s hard to beat whole life insurance. Many policyholders use whole life policies as their own personal banks and to fund retirement, growing cash value with a guaranteed rate of return and potential dividends, then taking loans against their policies and recapturing interest. On top of that, whole life policies receive tax advantages and help increase cash flow, liquidity, and asset protection. Because policies don’t expire, whole life insurance is ideal if you have children who will require lifetime care or you’re looking to pass on generational wealth

Cons: The additional benefits and guarantees offered with whole life insurance come at a higher price tag, sometimes 10-15x more than term policies. As with most permanent types of life insurance, whole life isn’t a “set it and forget it” purchase; it requires some continued involvement on the part of the policyholder, especially if you plan on utilizing policy loans. Meeting with your Wealth Strategist or insurance broker on an annual basis is recommended to ensure your policy remains aligned with your financial goals.

Duration: Lifetime of the policyholder.

Premiums: Level for the duration of the policy. Earned interest and/or dividends may be used to pay premiums, essentially making the policy self-paying in later years.

Guarantees: Guaranteed rate of return, guaranteed death benefit.

Universal Life Insurance

Overview: There are four types of universal life insurance: basic, guaranteed, indexed and variable. Basic universal life insurance earns a modest amount of cash value based on market performance and your insurance company may or may not offer you a minimum interest rate when the market doesn’t perform well. 

You can use your accumulated cash value for policy loans, withdrawals, or to pay your insurance premiums. Universal life insurance is a permanent type of insurance and is guaranteed to pay out a death benefit, provided premiums are paid. Payments are often flexible, but policies can often get more expensive and eventually deplete cash value and the face value (death benefit) if not properly managed. 

Pros: Compared to whole life insurance, basic universal life insurance is typically less expensive in the earlier years of the policy. Premiums are also flexible, which can be beneficial for individuals whose income fluctuates. 

Cons: Universal life insurance premiums aren’t guaranteed to remain the same for the duration of your life. Insurance companies can, and often do, increase premiums at their discretion; you may find your premiums increasing as you get older or in years the market underperforms, as the insurance company relies on premiums to make up for subpar earnings.

Duration: Lifetime of the policyholder.

Premiums: Flexible.

Guarantees: Guaranteed (adjustable) death benefit; may or may not have a guaranteed minimum rate of return.

Guaranteed Universal Life Insurance

Overview: Guaranteed universal life insurance functions like a term life insurance policy that doesn’t expire. These types of life insurance may accumulate cash value, but typically not a significant amount. If you need lifetime coverage, but can’t afford whole life insurance or don’t care about cash value, this type of insurance may be the right option.

Pros: Of all the types of permanent life insurance, this is often the most affordable. You don’t have to worry about your term expiring, leaving you without sufficient coverage. Your policy will pay out a death benefit regardless of when you pass away, provided your premiums are paid.

Cons: Guaranteed universal life policies typically only provide a death benefit; there are no living benefits and very little cash value.

Duration: Lifetime of the policyholder.

Premiums: Level for the duration of the policy.

Guarantees: Guaranteed death benefit.

Indexed Universal Life Insurance

Overview: Indexed universal insurance policies earn cash value that grows dependent upon the performance of an index, like the S&P 500. Policyholders invest a portion or all of their cash value into indices and earn returns based on market performance. Insurers may offer a minimum guaranteed interest rate and premiums are flexible. 

Pros: For people who enjoy investing in an index, this type of life insurance functions as a hybrid between an insurance policy and an investment tool. Depending on market performance, indexed universal life may see greater returns than other types of cash value life insurance. It gives the policyholder a degree of control in that they can choose to invest their cash value and choose how much, plus access flexible premiums. 

Cons: Some insurance companies place a cap on how much you can earn and/or limit your participation rates. Further, your insurer may raise your premium at their discretion.

Duration: Lifetime of the policyholder.

Premiums: Flexible. 

Guarantees: Guaranteed death benefit. May or may not have a guaranteed minimum rate of return.

Variable Universal Life Insurance

Overview: Variable universal life insurance is similar to indexed universal life insurance in that it allows you to invest your cash value, but with variable policies, performance is tied to groups of stocks or bonds—similar to mutual funds—instead of an index, and premiums are flexible.

Pros: For people who enjoy investing in stocks and bonds, this type of life insurance functions as a hybrid between life insurance and investment tool. Depending on market performance, variable universal life insurance may see greater returns than some other types of cash value life insurance. It gives the policyholder a degree of control in that they can choose to invest their cash value and choose how much, plus access to flexible premiums.

Cons: The investment funds accessed via variable life insurance often require additional financial management, which means there are administrative fees that can eat away at returns and may be charged regardless of how well investments perform. Investment options are limited to sub-accounts preselected by your insurance company. Variable universal life insurance may not provide a guaranteed rate of return, even during a market downturn, and insurers are able to raise premiums at their discretion.

Duration: Lifetime of the policyholder.

Premiums: Flexible.

Guarantees: Guaranteed death benefit.

Variable Life Insurance

Overview: Variable life insurance is similar to variable universal life insurance in that the policy depends on market factors like stocks and bonds. The performance of these sub-accounts, preselected by your insurance company, determine the cash value of your policy. There is no guaranteed minimum interest rate and premiums are not flexible.

Pros: For people who enjoy investing in stocks and bonds, this type of life insurance functions as a hybrid between life insurance and investment tool. Depending on market performance, variable universal life insurance may see greater returns than some other types of cash value life insurance. Premiums remain level and won’t go up with age or due to poor insurance company performance.

Cons: The investment funds accessed via variable life insurance often require additional financial management, which means there are administrative fees that can eat away at returns and may be charged regardless of how well investments perform. Investment options are limited to sub-accounts preselected by your insurance company. Variable life insurance does not provide a guaranteed rate of return, even during a market downturn.

Duration: Lifetime of the policyholder.

Premiums: Level for the duration of the policy.

Guarantees: Guaranteed death benefit.

Final-Expense Insurance

Overview: Sometimes the only expenses you want to avoid having your loved ones pay are those associated with your funeral. In this case, final-expense insurance may be the right type of life insurance for you. It pays out a modest death benefit sufficient to cover most end-of-life costs and is guaranteed, regardless of when you pass away. 

Final-expense insurance is a small whole life insurance policy with a face value of $50,000 or less. It may still earn a small amount of cash value that can be utilized by the policyholder, but it’s mainly targeted toward individuals who don’t qualify for larger whole life policies due to age or other health conditions. Most final-expense policies don’t require a medical exam.

Duration: Lifetime of the policyholder.

Premiums: Level for the duration of the policy.

Guarantees: Guaranteed death benefit. May also guarantee a rate of return.

Group Life Insurance

Overview: Group life insurance is typically provided by your employer. It’s usually a term life insurance policy that pays out a death benefit to your family if you pass away during the time you’re employed. The face value is often equal to your annual income or double your annual income. Some employers opt to offer group insurance in set increments, like $25,000, $50,000, or $75,000. Group life insurance can be a great employee benefit, but it rarely provides sufficient coverage and should be used in addition to your own personal insurance.

Pros: Group life insurance is often guaranteed issue, which means it doesn’t require a medical exam. Employers may pay for policies, so you can get coverage as an employee benefit at no cost to you. 

Cons: Group life insurance policies very seldom provide sufficient coverage. While you can often increase coverage at your own expense, you may need a medical exam. Further, if your employment is terminated, you change jobs, or you retire, you likely lose coverage.

Duration: Usually for a specified term, like the duration of your employment.

Premiums: Level, often covered by your employer.

Guarantees: Only guaranteed to pay out a death benefit if the policyholder passes away during the term for which they’re insured. 

Joint Life Insurance

Overview: Most types of life insurance only insure one life, unless supplemental insurance is purchased in the form of policy riders for a spouse or child. Joint life insurance is the exception. With a joint policy, both you and your spouse are insured without the need to purchase separate life insurance policies. This is usually a permanent type of life insurance, and can be structured in one of two ways:

  1. First-to-die: This type of life insurance pays out its death benefit to the surviving spouse after the other policyholder passes away. The policy then terminates, so no further premiums are required (although this can leave the surviving spouse with insufficient insurance down the road).
  2. Second-to-die: This type of life insurance pays out its death benefit to its named beneficiary after both policyholders have passed away. After the first spouse has passed away, the surviving spouse is responsible for premium payments for the duration of the policy.

Pros: Joint life insurance policies can accumulate cash value that may be used by either policyholder and guarantee a pay out to either the surviving spouse or surviving children (or a charity or any other beneficiary both policyholders choose). Premiums are typically level. Although more expensive than a single whole life or universal life policy, these types of life insurance policies can be cost-effective solutions for some couples.

Cons: Depending on your family’s insurance needs and financial goals, it might be more beneficial to have two separate insurance policies or add on a spouse rider. This is especially true if one spouse has a significant health condition that makes their share of insurance more expensive. Divorce can create issues with a joint life insurance policy; you may want to consider adding on a rider that allows the policy to be split if divorce occurs.

Duration: Usually for the lifetime of the policyholder(s), depending on policy type.

Premiums: Depends on the type of insurance used for the policy.

Guarantees: Guaranteed death benefit. May offer guaranteed rate of return when structured with whole life insurance.

Conclusion

Now that you have a basic understanding of the most common types of life insurance, it’s time to meet with a Wealth Strategist or insurance broker to narrow down your selection. At Paradigm Life, our virtual consultations are always free and we can provide you with a detailed insurance illustration for any type of insurance you choose.