We often talk about "life insurance" as if it’s a single thing. You just buy life insurance and you’re all set with your financial plan, right?
Not quite. That’s like saying you’re going to buy a car without thinking about whether you want something big to haul construction equipment, a speedy sports car, or an environmentally-friendly Tesla. There’s a big difference.
So after you’ve decided to buy a life insurance policy, you need to ask what the different types of life insurance are. And that question can come with more questions. Why are there so many different types of life insurance? What is the better choice between term and whole? Are variable, universal, and variable universal really all different things? Why is Alex Trebek trying to sell my grandma guaranteed issue life insurance?
But don’t worry – we’re here to help you make sense of all of the different types of life insurance. And once you understand the pros and cons of each, you’ll be able to pick the one that’s best for you and your family.
The types of life insurance we'll talk about are:
Term life insurance vs whole life insurance
Permanent life insurance
Universal life insurance
Variable life insurance
Variable universal life insurance
Simplified issue life insurance
Guaranteed issue life insurance
Final expense life insurance
Group life insurance
Finding the right policy
Term life vs whole life
When it comes to pitting life insurance policy types against one another, term life insurance vs whole life insurance is like Ali vs Frazier. People looking for life insurance are likely choosing between these two options.
Term life insurance is a "pure" insurance policy: when you pay your premium, you’re just paying for the death benefit that goes to your beneficiaries in the event of your death. Because you’re not paying for anything extra (like we’ll see with other policy types), term life insurance is more affordable compared to its peers, costing between $30-40 a month for a 30-year, $500,000 policy for healthy people in their 20s and 30s.
Whole life insurance, on the other hand, has a death benefit but also a cash value, where the premiums you pay monthly or annually is partially used to fund that cash value. A major part of the premium goes to fees for the first five years and a portion goes to maintaining the death benefit; over time, the fees portion decreases and more of the premium goes directly to funding the cash value. Thanks to the fees, and extra feature, a whole life insurance policy can easy cost four times as much as a term life policy (for the same death benefit amount).
Term life is also really easy to understand. You’re only paying for the death benefit, and when the term of the policy is up you stop paying the premiums. This works well for most people if the term ends after most of their obligations – mortgage, student loans, children’s education and so on – are no longer an issue and they don’t need that extra level of protection that life insurance offers.
Whole life lasts for as long as you pay the premiums, but the cash value component adds layers of complexity that many people aren’t prepared for, like surrender fees, taxes and interest, and other stipulations. That’s why nearly 40% of people drop their whole life policy within the first ten years.
People with complex financial situations, who can afford the higher premiums ($1,000-$3,000 in extra income every month is typically needed to make a whole life policy work well), or who need the cash value to cover things like endowments or estate plans might benefit from the greater options that a whole life policy provides. But if you want a simple policy that acts as income protection for your family in the event of your death, you likely don’t have to look much further than a term life policy.
For more information, see our guides on term life insurance and whole life insurance.
What is permanent life insurance?
Permanent life insurance is an umbrella term that covers several different, more specific life insurance types. In general, permanent life policies will last for as long as you pay the premiums, and they have a cash value component.
If that sounds a lot like whole life insurance to you, then congratulations! You paid attention to the last section. Whole life insurance is a type of permanent life insurance policy, so a lot of the same pros and cons we discussed above can apply to the other types.
Still, there are some key differences in the various types of permanent life insurance policies, so they’re worth talking about further.
What is universal life insurance?
Universal life insurance has a cash value, just like a whole policy. You know the drill – your premiums go toward the cash value and the death benefit. But there’s a twist: the policyholder of a universal life insurance policy 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 keep in mind that this can typically only be done after the first year of the policy, and only if there’s at least enough cash value in the policy to keep the policy inforce for another 60 days.
Additionally, 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 by your policy. Increasing it may subject you to further underwriting, while there may be fees to decrease it. Still, if your financial situation changes, the ability to change the death benefit amount within your policy is appealing. While this can be done with term life insurance policies, this feature is, along with the premium flexibility, one of the main selling points of a universal policy.
This flexibility makes universal life insurance attractive to some people, but it’s also confusing. Unlike term life insurance, where you pay a certain amount every month or year and know what the death benefit will be, the shifting balances of premiums and death benefits are more complex than what most people need, and it comes with the same added costs as other permanent policies.
What is variable life insurance?
The main difference between variable life insurance and whole life insurance is how the cash value component works.
With a whole life insurance policy, the cash value component is a savings account. That’s why, although the growth might be small compared to other investment options, there is a guaranteed minimum rate. It also includes dividend payments from the insurance company.
A variable life insurance cash value, though, is more along the lines of what you’d expect when you think of investing: a series of mutual fund-like sub-accounts where you can get some decent growth, but you can also lose money depending on the market. The cash value is more or less placed in the stock market.
While this makes variable life insurance policies a better investment option than whole life policies – the potential for higher, tax-deferred growth makes it a "super-IRA" – you can only invest in the sub-accounts available through your policy. That means you don’t get to choose from, say, the wide variety mutual funds that are available on the open market. Plus, while fees can be lower with a variable life insurance policy than a whole life policy, the product is riskier. Why? The same reason investing in stocks is risky: most people don’t know much about the stock market and don’t know enough to make changes for the investment. There’s too much management for the average person to do it effectively.
All of this makes a variable life insurance policy both a limited investment option and a limited life insurance option – just as we’ve seen with other permanent policy types.
For more information, see our full guide on variable life insurance.
What is variable universal life insurance?
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.
And if you think variable universal life insurance also comes with the same headaches as the other two...well, you’re right about that, too. Again, this is more complicated than most people looking for life insurance need, and isn’t your best available option for an investment or insurance. A simple, cheaper term life insurance policy and a dedicated investment option, like a mutual fund, covers the same ground as a variable universal life insurance policy, with lower fees, easier administration and likely better results in both categories.
What is simplified issue life insurance?
Typically when you apply for life insurance, you go through a paramedical exam as part of the underwriting process. This is when the insurer digs into your health and finds out how risky you are to insure. Ultimately, it helps them set your premium rate (and puts you in line for the best possible rates since the insurer has more information about you).
With simplified issue life insurance, though, you don’t have to go through that. 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. Considering you’re basically going on the honor system, it’s a little surprising that Prudential estimates that up to 70% of their simplified issue applicants get approved.
People in poor health may have to take the exam if they have too many health issues, and could flat out be denied. 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. That’s why the medical exam is important. Since there is no medical exam with simplified issue life insurance, the policies tend to be more expensive than term policies.
Even if you think a term life insurance policy will be prohibitively expensive, it’s worth getting a free quote to see exactly how much you’d pay. You may be surprised at how affordable it is.
For more information, see our full guide on simplified issue life insurance.
What is guaranteed issue life insurance?
Guaranteed issue life insurance takes the concept of simplified issue life insurance – foregoing 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. It’s why you see infomercials with Alex Trebek touting Colonial Penn Life Insurance.
Guaranteed issue life insurance is a last resort option when it comes to getting insured. Basically, if you’re able to get a different type of life insurance policy, do it. You’re likely to get a lower rate and can save yourself a lot of money (while getting a greater amount of coverage). But if you have a complex health issue or, again, are elderly and unlikely to be covered by a term policy, it’s worth looking into.
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. And that’s for a relatively low coverage amount – around $10,000.
Overall, guaranteed issue life insurance truly is a last resort for people age 50-80. If you’re able to, look into other life insurance policy types and talk to a licensed independent broker or agent to get a free quote before settling on this type.
For more information, see our full guide on guaranteed issue life insurance.
What is final expense 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, either 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. State Farm’s final expense policy, for instance, is available for people aged 50-80 (but the policy expires after the policyholder turns 100). 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 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. It’s good if you don’t have another way to pay for your funeral and don’t want to burden your family with the costs.
However, it has the same drawbacks as guaranteed issue life insurance: higher premiums for relatively low coverage amount. If you or your family are able to pay for a funeral through other means, that’s your best bet.
For more information, see our full guide on final expense insurance.
What is 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 mean, enroll in the coverage. 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.
What life insurance policy type is right for me?
Going back to our discussion on whole life insurance vs term life insurance, you’ll only find term life insurance policies on PolicyGenius since they are the best solution for most people who need life insurance. They’re most often the most affordable, they’re simple to understand, and they provide the straightforward protection that most people shopping for life insurance are looking for.
But that doesn’t mean that other life insurance policy types are wrong for everyone. Some people tout the benefits of permanent policies being "forced savings" for people, like a mortgage: most people aren’t great at saving for retirement, and a permanent policy provides separate cash accumulation for something they’d be paying for anyway (their life insurance policy). Simplified issue and guaranteed issue life insurance are options for people who might not be able to benefit from the paramedical exam portion of the application process. Final expense insurance is available for elderly consumers who don’t want to burden their family with burial costs.
In the end, you should speak to a licensed independent broker or agent or a financial advisor to determine which policy is right for you. Knowing the pros and cons of your choices will make you an informed consumer so you’ll be able to better understand the options you’re presented – and make the right choice for your family.