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Type of Insurance

insurance policy in usa

1. Health insurance

Why you need it: Both expected and unexpected health care expenses — including routine visits, medications, emergency stays, and serious surgeries — can add up quickly and cause a lot of debt for those who can’t afford the out-of-pocket costs.

Who needs it: Everyone

What it is: Health insurance is a contract between a health insurer and a policy holder that requires the health insurer to pay for all or at least a portion of medical costs. 

2. Car insurance

Why you need it: Driving while uninsured is against the law and dangerous because the driver and their vehicle aren’t protected against an accident, collision, or general theft and vandalism.

Who needs it: Drivers

What it is: Auto insurance covers cars, motorcycles, trucks, and other vehicles, and is intended to protect against physical damage or bodily injury that could result from driving, whether the incident is reckless or an accident.

3. Life insurance

Why you need it: Death can be expensive  ⁠— from settling an estate to planning a funeral, the associated costs can really set you back ⁠— but a life insurance policy will ease the financial burden placed on a surviving spouse and dependents (i.e. children).

Who needs it: Those with dependents

What it is: In the event of death, a life insurance policy pays a beneficiary an agreed-upon amount of money to cover the expenses left by the deceased. A beneficiary is the person or entity named in a policy who receives benefits, such as a spouse.

4. Homeowners insurance

Why you need it: Maintain your home and keep its property value high, plus be covered in the case of major damage, like a house fire.

Who needs it: Homeowners and landlords

What it is: Homeowners insurance covers the house you reside in and any associated structures, such as a porch, garage, and balcony.

5. Umbrella insurance

Why you need it: If you think you may need extra coverage in addition to another type of insurance policy, for example on a home or vehicle, then umbrella insurance will help further protect you from risk of being sued for damages.

Who needs it: Anyone already insured

What it is: Liability insurance is what’s called umbrella insurance, because it covers costs in excess of other insurance policies.

6. Renters insurance

Why you need it: Things happen — that’s a mantra every renter knows to be true, and so they protect themselves and their property while renting. In fact, many landlords require it.

Who needs it: Tenants

What it is: Renters insurance is used by tenants to cover personal property in case of damage or theft, which is not the responsibility of the landlord. 

7. Travel insurance

Why you need it: Planning to jet off to a new destination? Then make sure the cost of your airfare is covered in case of medical emergencies or other incidents that may cause a trip to be cut short. 

Who needs it: Travelers

What it is: Travel insurance covers trip cancellations, lost or misplaced luggage, travel accidents, and even medical expenses while on the trip.

8. Pet insurance

Why you need it: Paying into pet insurance may be more cost-effective than paying a lump sum to your vet should your pet need emergency medical treatment, like an emergency room visit.

Who needs it: Pet owners

What it is: Pet insurance (mostly for dogs and cats) covers all or part of veterinary treatment when a pet is hurt or sick. There are two types of pet insurance: a wellness plan that covers routine visits and shots, and a health insurance plan that is more comprehensive of genetic diseases and major surgeries.

Covid has caused many Americans to take stock of their lives and finances, and plan ahead in case they’re not around. A Forbes Advisor survey found that 46% of U.S. adults say that the Covid pandemic led them to consider buying life insurance or taking out additional life insurance.

Here’s a look at the different types of life insurance and the pros and cons of each type.

Different Types of Life Insurance

When you start looking for life insurance, you’ll face two main decisions right away: What type of life insurance is best for me? And how much life insurance do I need?

As you get life insurance options and quotes, you’ll likely navigate toward a type and coverage amount that’s in line with how much you want to pay.

To get you started on your search, here’s an overview of types of life insurance and the main points to know for each.

Term life insurance

Whole life insurance

Universal life insurance

Variable life insurance

Burial insurance/funeral insurance

Survivorship life insurance/joint life insurance

Mortgage life insurance

Credit life insurance

Supplemental insurance

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Term Life Insurance

The basics: Term life insurance insurance has a specific end date for the level term period, when rates stay the same. After this period you can renew the policy, but at higher rates each year. Choices of coverage lengths are generally 5, 10, 15, 25 or 30 years. It’s the cheapest way to buy life insurance because you’re buying only insurance coverage and not paying for cash value life insurance.

Who is it good for: Term life insurance is ideal for people who want life insurance coverage for a specific debt or situation. For example, some people buy it to cover their working years as income replacement for their family in case they pass away. Some people buy term life to cover the years of a mortgage or other large debt.

Downside: If you still need coverage after the level term period expires, you could find the renewal rates to be unaffordable. And buying a new life insurance policy could be extremely pricey based on your age and any health conditions you’ve developed.

Whole Life Insurance

The basics: Whole life insurance can provide coverage for the duration of your life. An account within the policy builds cash value over time by using part of your premium payment and adding interest. A policy will have built-in guarantees that the premium will not increase, the death benefit remains the same, and the cash value will earn a fixed rate of return.

Who is it good for: Whole life is suited for people who want lifelong coverage and are willing to pay for the guarantees provided by the policy.

Downside: Because of the guaranteed features, whole life insurance is one of the more expensive ways to buy life insurance.

Universal Life Insurance

The basics: Universal life insurance can be hard to understand because there are a few varieties and with very different features. Universal life (UL) can be cheaper than whole life insurance because it generally doesn’t offer the same guarantees.

With some forms of universal life you can vary premium payments amounts and rejigger the death benefit amount, within certain limits. UL policies often have a cash value component.

Who is it good for: Universal life insurance can be good for someone looking for lifelong coverage. Some varieties of UL are suited for people who want to tie their cash value gains to market performance (indexed and variable universal life insurance).

Downsides: If cash value is your main interest, not all UL policies guarantee you’ll make gains. And if you’re interested in flexible premiums payments, you have to stay on top of your policy’s status to make sure that the policy’s fees and charges don’t deplete your cash value and cause it to lapse. Understand what’s guaranteed within a UL policy and what isn’t.

Variable Life Insurance

The basics: Variable life insurance offers permanent coverage with cash value. The policyholder chooses the sub-accounts in which to invest and those decisions determine how much the cash value account grows. You can also lose money based on the performance of your sub-accounts.

Who is good for: People who want lifelong coverage and who seek to take an active role in their life insurance investments. Those with variable life insurance also shouldn’t mind taking on risk.

Downsides: You can lose money on your death benefit and cash value if you choose the wrong investments.

Burial and Funeral Insurance

The basics: You may see this kind of policy called burial, funeral or final expense insurance. No matter the name, it’s usually a small whole life insurance policy that’s intended to pay only for funeral costs and other final expenses. Burial insurance is often offered as a policy that you can’t be turned down for and that doesn’t require a medical exam.

Who is it good for: These types of policies are generally for people in poor health who don’t have other life insurance options and who need insurance for funeral expenses.

Downsides: Burial insurance policies are expensive, based on the amount of coverage you get.

They also have a safeguard for the life insurance company: Your beneficiaries won’t get the full death benefit if you pass away within two or three years after buying the policy. Check the policy’s timeline for these “graded death benefits.” Your beneficiaries might receive only a refund of the premiums you paid in, plus some interest.

Survivorship Life Insurance

The basics: These joint life insurance policies ensure two people under one policy, such as a husband and wife. The payout to beneficiaries is made when both have passed away. You may see them called second-to-die life insurance, but for understandable reasons the industry is moving away from this name.

Survivorship life insurance can be less expensive than buying two separate life insurance policies, especially if one of the people has health issues.

Who is it good for: Survivorship policies can be beneficial in estate planning when the life insurance money is not needed by a beneficiary until both of the insured people have passed away. Survivorship life insurance might be used to fund a trust, for example. It’s also suited for high net worth couples who want to provide money to heirs for estate taxes. Or it could be used by a couple to provide a donation to charity.

Downside: If two spouses are insured and one would suffer financially if the other passed away, this is not the right policy type. The surviving spouse does not receive any life insurance benefits. The payout is only made when both have passed away.

Mortgage Life Insurance

The basics: Mortgage life insurance is designed to cover only the balance of a mortgage and nothing else. This policy type is different from the life insurance types above in two major ways. First, the death benefit is paid to the mortgage lender, not a beneficiary that you choose. Second, the payout is the balance of the mortgage, or partial balance if that’s what you insured.

Who is it good for: Mortgage life insurance is intended for people who are primarily concerned about their family being burdened by the mortgage if they passed away. It can also be appealing to someone who doesn’t want to take a medical exam to get life insurance.

Downside: This type of policy won’t provide financial flexibility for your family.

If you’re looking for life insurance to cover a mortgage or other debts, you’re better off with term life insurance. You can choose the term length and amount, and provide more than just mortgage money to your family. Your family can use a payout for any purpose. They may decide to use the money elsewhere.

Credit Life Insurance

The basics: Like mortgage life insurance, this insurance covers a specific debt. When you take out a loan you might be offered credit life insurance. The payments can usually be rolled into your loan payments. The life insurance payout is the balance of the debt and it’s paid to the lender, not your family.

Who is it good for: If you’re concerned about how your family would pay a certain debt if you passed away, credit life insurance might look appealing and convenient. It can also be attractive because there’s no medical exam required to qualify.

Downside: Credit life insurance is very narrow and doesn’t allow financial flexibility in the future. You’re probably better off with term life insurance, which you can use to cover many concerns, from debt to income replacement to funeral expenses. A broader policy like term life will give your family more financial options if you pass away.

Supplemental Life Insurance

The basics: The life insurance you may have through work is supplemental life insurance, also known as group life insurance. It sets rates based on the group, not the individual.

Who is it good for: Because usually it’s free or inexpensive, group life insurance is a good value. It’s good as supplementary coverage to your own individual life insurance policy.

Downside: If you lose the job you generally lose the life insurance, too. That’s why it’s best to have your own life insurance that’s not tied to the workplace. Plus, on your own you can buy higher amounts of insurance.

Compare Different Types of Life Insurance

Let’s take a look at the multiple types of life insurance to help find the right policy for you.

Type of life insurance Policy length Cash value Premiums Death benefit

Term Level term period varies, but often can be 5, 10, 15, 20 or 30 years No Multiple options: Level, annual renewable, decreasing Fixed

Whole Permanent Yes Level Fixed

Universal Permanent Yes Might be flexible Might be flexible

Variable Permanent Yes Might be flexible Might be flexible

Burial Permanent Yes, typically Level Fixed

Survivorship Permanent, typically Yes, typically Varies Paid out after second person dies

Mortgage Policy in effect for life of mortgage No May fluctuate Declining death benefit as you pay down mortgage

Credit Permanent, typically No Level Pays off remaining debt to the lender

Supplemental Connected to your employment No Low or no cost Fixed

What’s the Best Type of Life Insurance?

The type of life insurance that’s best for you depends on why you need coverage. Someone who wants to make sure their loved ones have money to pay for a funeral requires much different life coverage than a person who needs it to pay off a $300,000 mortgage.

Here’s a look at the best life insurance based on your needs.

Reason for coverage Term life Whole life Universal life Variable life Burial

Guaranteed death benefit X X X X

Pay off final expenses only X X

Cheapest policy for most coverage X

Minimal death benefit X

Easiest policy to understand X X

Policy with cash value X X X

Wants the most influence in cash value investments X

Want most flexibility X X

Best chance to pay off mortgage if you die X

Best chance to pay off college expenses if you die X

Want to customize policy with living benefit riders X X X

Types of Life Insurance By Underwriting

Insurance companies often conduct an underwriting process to gauge a person’s health and risk. That process results in whether an insurance company insures the applicant and how much to charge for premiums.

Here are the different types of life insurance underwriting:

Fully underwritten

Medical exam required

Lengthy application process with multiple questions related to health, family history. lifestyle and hobbies

Cheapest policies since life insurance company does its due diligence to check on the person’s insurability

Guaranteed issue

Doesn’t require a medical exam

No health questions asked

Often the most expensive policies

Simplified issue

Doesn’t require a medical exam

Applicants must answer a handful of health-related questions and a “yes” answer could result in denial

Insurance company usually uses algorithms that leads to quick approval decision

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