Money Research Collective’s editorial team solely created this content. Opinions are their own, but compensation and in-depth research determine where and how companies may appear. Many featured companies advertise with us. How we make money.
The Different Types of Life Insurance
By Susan Doktor MONEY RESEARCH COLLECTIVE
If you’re buying life insurance for the first time, there’s a lot to learn. While life insurance resembles other types of insurance in some respects, it’s a more complicated financial product than, say, auto or homeowners insurance.
It may be tough to figure out what kind of policy you need now and in the future. So let’s walk through the various types of life insurance and help you find the right option.
Table of contents
- What are the main types of life insurance?
- Comparing different life insurance types
- Main features of a life insurance policy
- Which life insurance should you choose?
- How much does life insurance cost?
- Types of life insurance FAQs
- Summary of our guide to the different types of life insurance
What are the main types of life insurance?
Life insurance breaks down into a few different categories and subcategories. Each type offers its own benefits and limitations.
Term life insurance
Term life insurance, as its name implies, covers you for a predetermined length of time. Like all kinds of life insurance, it pays a death benefit — a lump sum payment upon your death — to your named beneficiaries. This type of policy is best for someone who needs coverage for the duration of a financial obligation, such as a mortgage.
You can buy a term life insurance policy lasting from 10 to 40 years. Your options depend on your age and the life insurance company you choose. If you are still alive once your term is up, your policy will expire. Some companies offer you the possibility to convert it to a permanent life insurance policy.
Term life is the more affordable life insurance option compared to other policies. We requested quotes from several term life insurance carriers using a hypothetical 30-year-old non-smoking woman in excellent health. For a 30-year policy offering a $500,000 death benefit, premiums ranged from about $25 to $50 per month.
Whole life insurance
Whole life insurance is intended as lifelong protection. It falls into the category of permanent insurance. Sometimes people refer to it as “traditional” life insurance.
A primary difference between whole life and term life is that a whole life policy functions as an investment. It accumulates tax-deferred cash value as you pay your premiums. A portion of each payment you make applies to your savings.
Your savings earn money at an interest rate guaranteed when you purchase your policy. The other parts of your premiums go towards your death benefit and policy costs. You can access your accrued cash value anytime while the policy is in force by withdrawing or borrowing from it through a loan.
To keep a whole life policy active, you must make your payments. Your premiums won’t increase at any time throughout your policy ownership.
Variable life insurance
Another permanent coverage option is variable life insurance. Like whole life insurance policies, variable policies accumulate cash value. The two types of plans differ based on the investment options offered.
With variable life, your policy’s cash value is held in a series of investment instruments. It could include stocks, bonds, mutual funds and money market accounts. As such, variable life insurance policies may offer greater income potential because some investment options are riskier. With greater risk comes the possibility of greater rewards.
But the opposite is also true. Variable life insurance isn’t considered as safe as traditional whole life insurance. However, most policies offer the option of putting some of your cash value in a non-investment account. It would pay a modest amount of guaranteed interest.
The primary advantage of variable life insurance is that it affords customers more flexibility. Policyholders can select their investment options. But that flexibility comes at a cost. You may have to pay higher sales, administrative and management fees.
Universal life insurance
Universal life insurance shares several similarities with traditional whole life and variable life, but the death benefit and cash value features differ. It’s considered permanent coverage and accumulates cash value as you make premium payments. The money you earn on your cash value is tax-deferred. You can also access your cash value and borrow from your policy.
This type of policy is less expensive than other types of permanent life insurance. It offers fewer guarantees but more flexibility. Firstly, level premiums aren’t guaranteed. Premiums will likely increase as you age or decrease your payments.
You can temporarily lower your payments if you need to. But you must make a minimum monthly payment to keep your policy in force. Additionally, you must monitor your policy’s cash value component to ensure there are sufficient funds to avoid a lapse, especially if you lower or skip a payment.
Universal life also offers flexibility when it comes to your death benefit. You can change your death benefit as your beneficiaries’ needs change. Lowering it will decrease your premium payments.
Final expense insurance
Final expense costs can add up to $10,000 or more. After you die, your family will face expenses associated with your funeral and other costs, such as medical bills or debt.
Final expense insurance — or “burial insurance” — is a type of whole life policy designed to eliminate the financial stress of paying for end-of-life expenses.
These policies best suit seniors and individuals with serious health issues and low coverage needs. This option doesn’t make sense for young people. If you pay for a policy for years and years, your payments could exceed your policy’s death benefit.
Some, but not all, final expense policies offer guaranteed acceptance without a medical exam or health questionnaire. There are two main types of policies: guaranteed issue and simplified issue.
Guaranteed issue life insurance
Guaranteed issue life insurance is a type of final expense insurance that offers near-guaranteed acceptance. You don’t have to do a medical exam or answer health questions. It usually has very low coverage limits: between $10,000 and $20,000.
One of the downsides of guaranteed life insurance is that most are subject to a graded benefits scale. Policies typically include a waiting period of one to two years, during which your death benefit may be smaller than the face value of your policy.
Because they require no medical exam and insurers take on a lot more risk when they issue you a policy, this is one of the most expensive life insurance options. It’s best suited for customers who need immediate coverage and can settle for a low coverage limit.
Simplified issue life insurance
The other type of final expense coverage is simplified issue life insurance. It doesn’t require a medical exam, but you may need to take a health questionnaire to apply for coverage.
It differs from guaranteed issue policies because premiums are typically lower, and coverage amounts can be higher. Additionally, your full death benefit is available right when your policy is issued — there’s no waiting period.
Comparing different life insurances types
| Policy Type | Accrues Cash Value | Flexible Premiums | Medical Exam Required | Offers Investment Options | Borrow Against Your Policy |
| Term | No | No | Sometimes | No | No |
| Whole | Yes | No | Sometimes | No | Yes |
| Variable | Yes | Yes | Sometimes | Yes | Yes |
| Universal | Yes | Yes | Sometimes | Yes | Yes |
| Final Expense | Yes | No | No | No | Yes |
Main features of a life insurance policy
A life insurance policy is made up of a few different parts. Here are the major features you should know.
Policy length
Your life insurance policy’s length is only something you have to worry about when purchasing term life insurance. You can buy term life policies that last from 10 years to 40 years.
Permanent insurance doesn’t have an expiration date. It’s worth something from the time you pay your first premium until the time you die, as long as you keep up with your payments.
Beneficiaries
Beneficiaries are the people who will receive the death benefit from your life insurance policy. You can name more than one beneficiary. They should be the people who depend on you and who you want to take care of when you’re gone.
Death benefit
A death benefit is a lump sum payment your beneficiaries receive when you die. Insurers let you decide how much money you want to direct their way. The amount you choose equals your coverage limits.
Cash value
Cash value applies to permanent life insurance policies. Term life insurance doesn’t accrue cash value — it only provides a death benefit. With permanent life insurance, when you begin to make premium payments, a portion of your payments is directed towards savings, where it typically gains interest.
The longer you make payments, the more your savings grow. You can borrow against your policy’s cash value to help you meet your financial goals. You can also use your cash value to pay premiums.
Which life insurance should you choose?
The best life insurance option for you depends on a lot of factors. Consider your age and overall health to determine which policies you may be eligible for — and how much they’ll cost. Other factors to consider are your personal and financial goals.
Bear in mind that some people carry multiple types of life insurance. Your needs may change over time.
How much does life insurance cost?
The cost of life insurance depends on many factors, including:
- Your gender, height and weight
- Your age and health at the time your purchase your policy
- Whether you smoke
- Your family’s medical history
- The coverage you choose
- Any policy add-ons you purchase
- Your occupation and hobbies
- Certain lifestyle indicators (such as your driving and arrest records, alcohol intake and more)
- Your location
Types of life insurance FAQs
Summary of our guide to types of life insurance
There are many different types of life insurance. The one most suitable for you depends on your age, health and financial situation. Keep the following thoughts in mind to help you choose the best plan for your needs.
- Your life insurance needs can change as you age or set new financial goals
- Life insurance is cheaper when you’re young and healthy
- Term life insurance doesn’t have a cash value component, but permanent life insurance does
- The cost of life insurance depends on many variables related to you and your health
- Term life insurance is available for a set amount of time
- Permanent life insurance policies are intended to be lifelong policies
- The different types of permanent life insurance policies vary based on their investment options and flexibility
- Some permanent life insurance policies allow you to direct the investment made with your plan’s cash value toward a wide range of investment options
- Final expense insurance is available to help cover end-of-life costs like your funeral and medical bills
- Shop around for a policy — all life insurance companies have different offerings
