Key Takeaways
- Life insurance typically falls into one of two types — term life or permanent life insurance.
- Term life insurance provides coverage for a specific number of years, called the term, and coverage stops without a cash payout when the term ends.
- Permanent life insurance can provide lifetime coverage and builds cash value — but it is typically more expensive than term life.
- There are several kinds of term and permanent life insurance that cover specific contingencies, allowing you to prepare for specific situations in life.
What Types of Life Insurance Exist
There are two main types of life insurance — term life and permanent life insurance. Virtually all policies fall into one of these two categories, giving you several different options to meet your needs.
When shopping for life insurance, consider how long you want coverage, how much you’re willing to pay for coverage and whether the policy will build cash value over time. Your answers will help determine the best type of policy for your needs and situation.
Life insurance can be one of the most important investments you make to protect your loved ones in the event of your death. There are many options available, with something for even the most unique situation.
Stephen Kates, CFP®Principal Financial Analyst for Annuity.orgStephen Kates, CFP® is a personal finance expert specializing in financial planning and education. He serves as the Principal Financial Analyst for Annuity.org, where he delves into industry trends to support consumers and financial advisors on wealth management, annuities, retirement planning, and investing.
Term Life Insurance
Term life insurance is purchased for a specific period of time — the term. These policies are typically sold for 5-, 10-, 20- or 30-year terms.
They stay in effect for that term as long as you continue to pay premiums. If you die within the term, the insurance company pays a death benefit to your beneficiaries.
If you outlive the term, the policy expires and there is no payout.
Term life insurance is usually a good choice of life insurance for most people. It can cover a specific debt — such as a mortgage — or cover your family’s income and expenses if you die during your prime working years.
It’s generally the cheapest coverage you can buy if you are young. You can renew term life insurance when the term expires, but the renewal rates can be increasingly expensive as you age. Some term life policies can also convert to permanent life policies.
Permanent Life Insurance
Permanent life insurance provides long-term coverage. So long as you keep paying your premiums — no matter how long you live in many cases — you will receive a death benefit when you pass away.
There are two main versions of permanent life insurance — whole life and universal life insurance.
Whole Life
Whole life insurance offers guaranteed permanent coverage with fixed premiums and may pay dividends that can go towards the policy’s cash value or be used to pay the premiums.
Universal Life
Universal life insurance guarantees a death benefit usually until you’re 95 or 100 years old. Universal life invests part of your premiums to generate tax-deferred returns and also grows at a minimum guaranteed interest rate.
Comparing Types of Life Insurance
The features vary widely between term and permanent life insurance. There are key differences between permanent life policy options as well.
These factors can make a big difference when it comes to the kind of life insurance you want or need. It’s important to consider these differences to determine which type of life insurance is right for you.
Comparing Term, Whole and Universal Life Insurance
| FEATURES | TERM LIFE INSURANCE | WHOLE LIFE INSURANCE | UNIVERSAL LIFE INSURANCE |
|---|---|---|---|
| Duration | 5-, 10-, 15-, 20-, 25-, or 30- year terms | Lifetime | Lifetime |
| Premiums | May increase periodically or remain constant throughout the term. | Remain constant. Typically more expensive than other life insurance options. | Varies. Premiums may be customized by the policyholder. |
| Cash Value | No | Yes | Yes |
| How Cash Value Grows | N/A | Cash value accumulates at a minimum guaranteed rate. You may also accumulate cash dividends from the insurance company. | May offer the ability to accumulate greater cash value but comes with higher risk. |
| Guaranteed Death Benefit | Yes | Yes | Yes |
| Chief Risks | No risk of losing your coverage, but there is no cash value at the end of the term. | Other investment options may offer higher returns. | Cash value rates are not guaranteed. They may decrease after you purchase the policy. |
Life Insurance Underwriting Types
Underwriting is the process a life insurance company uses to determine whether it will accept your application — and if so, what premium it will charge you. The underwriting process determines how much of a risk the company will take insuring you. This is based largely on your age and health.
The actual requirements depend on the type of underwriting the company uses in your case. There are three main types of insurance underwriting — fully underwritten, guaranteed issue and simplified issue.
Fully Underwritten
Fully underwritten life insurance policies are the most seriously vetted type but can be less expensive for those in good health. These require a medical exam and extensive questions about your lifestyle, hobbies and your personal and family medical histories.
Guaranteed Issue
Guaranteed issue policies typically come with the least hassle and the highest price tags. These don’t require a medical exam, and there are no health questions to answer. Guaranteed issue policies may still be the best choice for older applicants or people with serious medical conditions who don’t qualify for a fully underwritten policy.
Simplified Issue
Simplified issue underwriting does not require a medical exam, but you must answer several health-related questions. Answering “yes” to any one of these questions can result in a denial of coverage. This can often lead to a quick decision from the company as to whether it will approve your coverage or not.
What Other Types of Life Insurance Are There?
In addition to basic term life and permanent life insurance, there are several other kinds of life insurance that tend to fall under one of the two. These are often specialty insurance policies designed to cover a specific contingency or need.
- Accidental Death and Dismemberment Insurance
- Also called AD&D insurance, these policies pay a benefit if you die in an accident, lose one or more limbs or lose your sight or hearing. The amount of the benefit depends on the type and number of losses with the largest benefit typically being for accidental death.
- Funeral and Burial Insurance
- Also called final expense insurance, this is a small whole (permanent) life insurance policy designed to cover burial and other final expenses when you die.
- Joint Life Insurance
- Joint life insurance covers two people — typically spouses, but also business partners or others. A first-to-die version pays out if one person dies and doesn’t cover the second person. The second-to-die version — also called survivorship life insurance — pays out after each policyholder dies, allowing the benefit to cover estate taxes or care for a dependent if both policyholders are gone.
- Mortgage Life Insurance
- A mortgage life insurance policy pays off the balance on your mortgage if you die. The death benefit goes to the lender — not your family or other beneficiaries.
- Credit Life Insurance
- Similar to mortgage life insurance, a credit life insurance policy pays off a specific loan — such as an auto or home equity loan — if you die before paying it off. Banks may offer you a credit life policy when you take out large loans. The benefit goes to the lender, not your beneficiaries.
- Supplemental Life Insurance
- This is also called group life insurance because it is typically offered as group coverage through employers. Premiums are based on the group of employees rather than an individual. The coverage is often free to workers as an employee benefit, but coverage ends when your employment ends.
- Variable Life Insurance
- Variable life insurance is a type of permanent insurance that offers cash value. It allows the policyholder to take an active role in life insurance investments, but comes with the risk of losing cash value.
Other Types of Life Insurance
The best type of life insurance depends on your needs and long-term financial goals. Speaking with a financial professional can help you determine the best option for your particular situation.
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