Starling & Associates
Term life insurance can be contrasted to permanent life insurance such as whole life, universal life, and variable universal life, which guarantee coverage at fixed premiums for the lifetime of the covered individual unless the policy is allowed to lapse.
Whole life insurance, has a death benefit but also a cash value, where the premiums you pay monthly or annually are partially used to fund that cash value. A major part of the premium goes to fees and maintaining the death benefit; over time, the fees portion decreases and more of the premium goes directly to funding the cash value.
Due to the fees and the extra feature, a whole life insurance policy can cost six to 10 times as much as a term life policy (for the same death benefit amount).
Whole life lasts for as long as you pay the premiums. However, the cash value component can make whole life more complex than term life because you have to consider surrender fees, taxes, and interest as well as other stipulations.
Still, it may be worth it if you need the cash value to cover things like endowments or estate plans, which might benefit from the greater options that a whole life policy provides.
Universal life insurance has a cash value, just like a whole policy. Your premiums go toward both the cash value and the death benefit.
But there’s a twist: the policyholders of universal life policies can change the premium and death benefit amounts without getting a new policy.
Basically, although you have a minimum premium to keep the policy in force, you can use the cash value to pay the premium. That means if you have enough money in the cash value, you can use that to skip premium payments entirely, letting the accrued interest do the work.
But the cash value of a universal life insurance policy has an interest rate that’s sensitive to current market interest rates. If the interest rate being credited to your policy decreases to the minimum rate, your premium would have to increase to offset the reduced cash value.
You can also adjust the death benefit within limits outlined in your policy. Increasing it may subject you to further underwriting, while there may be fees to decrease it.
Variable Universal Life
Variable Universal Life
If you think variable universal life insurance is just some aspects of universal and variable life insurance policies mashed together…well, you’re mostly right.
A variable universal life insurance policy takes the best (or worst, depending on how you look at it) of the other two policies: you can adjust the premium and death benefit amount while investing the cash value in the policy’s sub-accounts.
But variable universal life insurance also comes with the same headaches as the other two. Again, this is more complicated than most people looking for life insurance need, and it isn’t your best available option for an investment or insurance.
The better option is a combination of a simple, cheaper term life insurance policy and a dedicated investment option, like a mutual fund. This offers the same insurance coverage as a variable universal life insurance policy with lower fees and easier administration
Guaranteed Issue Life
Guaranteed Issue Life
Typically when you apply for life insurance, you go through a paramedical exam as part of the underwriting process so the insurer can find out how risky you are to insure. Ultimately, it helps them set your premium rate.
With simplified issue life insurance, though, you can skip the medical exam. That’s the "simplified" part of this policy type: known as a "no exam policy", a simplified issue policy gets you life insurance without the health exam.
You’re not out of the woods completely, though. You don’t need to go through the medical exam, but you do need to fill out a health questionnaire, answering questions like if you smoke, have been diagnosed with serious illnesses, and so on.
People in poor health may have to take the exam if they have too many health issues, and they could flat-out be denied by insurers. For those healthier people in a hurry, though, it might be a good option to skip scheduling the paramedical exam, which adds some time to the underwriting process.
But with this benefit comes a major financial drawback.
With a term life insurance policy, your premium rates are directly tied to your chances of outliving your policy. If you’re young and/or healthy, you’ll pay lower rates than someone who is older and/or in poor health.
Guaranteed issue life insurance takes the concept of simplified issue life insurance – forgoing the health exam – and takes it a step further in that you don’t have to answer any questions about your health, either. As long as you can pay the premium, the insurer will cover you, needing only your age, sex, and state of residence.
That makes it appealing for older people, whose declining health makes it prohibitively expensive to get coverage with another insurance types. (Like "Colonial Penn")
Guaranteed issue life insurance is useful for elderly applicants, but others can likely get more life insurance coverage at a lower cost with a different policy type.
Just like with simplified issue life insurance, the lack of insight into your health conditions that a medical exam and interview would provide means that you’re going to be paying more for coverage. In order to cover the costs of an average funeral, you’d have to pay more than $200 a month for around $10,000 of coverage.
For more information, see our full guide on guaranteed issue life insurance.
Still looking for a way to cover funeral costs if you passed on guaranteed issue life insurance? You’re in luck, because there’s a life insurance policy that’s specifically for that purpose.
Final expense insurance is a unique type of policy: it covers the cost of anything associated with your death, whether its medical costs, a funeral, or cremation – whatever your literal final expense is. It’s usually only issued to people of a certain age and the policy is valid up to a certain age.
Like permanent life insurance policies, there’s a cash value that can grow over time. Final expense insurance is a simplified issue policy in most cases, but if you don’t pass the health questionnaire you’ll be placed in a guaranteed issue policy instead.
Final expense insurance is usually attractive to older people who don’t have other life insurance coverage (maybe they outgrew their term life policy) and don’t have enough savings to pay for their own funeral, which can cost upwards of $8,000.
Coverage is usually for small amounts, from $5,000 to $25,000, to cover those expenses.
Group Life Insurance
Group Life Insurance
Group life insurance isn’t technically a life insurance type, but it’s important to know how it's different from privately purchased term life.
If you have life insurance provided through your employer, you’re familiar with group life insurance. Group life insurance is most commonly term (although it can be whole). The real reason we bring it up, though, is that most people think their employer life insurance is enough, when in most cases it isn’t.
Make no mistake: if your employer is offering life insurance at no extra cost to you, it’s a great benefit. By all means, get insured. But if you need life insurance to protect your family, employer-provided coverage may not be sufficient.
Employer life insurance provides fairly low coverage, usually only one to two years’ worth of salary, when you could need $500,000 or more in coverage in order to meet your financial obligations.
If you want to go for more, it’s likely to be more expensive than buying your own policy if you’re a person in relatively good health.
In short, don’t automatically pass up group life insurance, but don’t automatically dismiss other options, either. Make sure it fits your needs and see how you can work it into your private coverage.