If you are thinking about taking out a life insurance policy, you need to know the different types that are available. Navigating all the options and terminology can be confusing so we’ve broken down each type into an easy-to-understand summary, so that you can use this brief overview as a springboard into finding the right policy for you.
Before We Get Started
Each of the policies that we will list below will have their own pros and cons, which you will have to weigh up against your own situation. However, one bit of advice that is common across all types is that you need to take the time to figure out what your exit plan is. Whilst your plan will more than likely be structured around ending at the time of your passing, it is worth thinking about what happens if your situation changes before that date. For example, if you no longer need coverage, you could consider a life settlement, which would require you to sell to a third party in exchange for an immediate cash pay-out. It is worth thinking about this ahead of time and using an online calculator to estimate the value of your life insurance, to ensure you get a fair price when you sell.
What Are the Different Types?
Moving on, let’s break down the different types of coverage that are available to you. With each one, we have provided a simple summary of the key points you should be aware of. It is also worth noting that each policy will fall into one of two main categories: term life insurance and permanent life insurance.
- Term life insurance: As the name suggests, this type of policy is taken out for a specified period, usually with the stipulation that the policy will end at the end of this time frame. Note that some providers do allow for renewals. This type of policy is often cheaper than other permanent options, however you should be aware that if you outlive your policy duration, your beneficiaries would not receive a pay-out.
- Whole life insurance (permanent): Essentially, this policy covers you until your death, with no deviation in the premium prices or the benefit amount. Note that this type of policy is usually more experience than other choices.
- Universal life insurance (permanent): This type of policy is very similar to the one mentioned previously, in that it covers you for your lifetime and the benefit amount will stay the same. However, the key difference is that the premiums that you pay are flexible, meaning that you could choose to pay less for one month than you would during other months. They key thing to note with this is that you will be expected to cover the difference in later months to ensure you keep your benefits, so it is worth planning out your payments with this option.
- Final expense insurance (permanent): In this case, these policies are intended to payout to cover the costs of things such as funerals and burials. They are not designed to cover your loved ones for an extended period of time, as is the case with the previous types.
- Simplified/guaranteed issue insurance (permanent): While the other types of insurance will more than likely require you to undertake a medical examination as part of the application process, this type is different in that it only asks you to fill in a questionnaire. Normally, these policies are designed for older applicants or applicants with terminal illnesses who would struggle to get cover elsewhere.
- Group life insurance (normally term): As the name suggests, this type of policy is purchased as part of a group, usually through your employment as part of a benefits package or something similar. Usually, these policies act as a starting step for those who haven’t yet acquired a life insurance policy, as the benefit amount isn’t normally very high.