Types of life insurance

There are so many different options for buying life insurance but it’s actually not as complicated as it may seem. When it comes down to it, there are essentially two kinds of policies: term life insurance and whole life insurance. Term life insurance lasts for a specific amount of time (the term) and expires at the end of the term. Whole life insurance, on the other hand, is a form of permanent life insurance and lasts your entire life. There are more insurance plans that fall into these two categories, each with their own benefits and drawbacks.

What are the different types of life insurance?

You may be familiar with term and whole life insurance, but there are several other options depending on your needs and financial situation. We’ll explain everything you need to know about the following eight types of life insurance:

• Term life insurance

• Whole life insurance

• Universal life insurance

• Indexed universal life insurance

• Variable life insurance

• Variable universal life insurance

• Final expense insurance

• Group life insurance

Life insurance terms review

Before we break down the important differences between the different types of life insurance policies, let’s review some key terms you should know when shopping for life insurance.

Common life insurance terms explained

→ Check out our full glossary of life insurance terms

Term life insurance

Term life insurance lasts for a number of years before it expires. If you die before the term is up, a set amount of money, known as the death benefit, is paid to your designated beneficiary. Term insurance is considered the simplest, most accessible life insurance policy.

When you make your payments (known as your premiums), you’re paying for the death benefit that will go to your beneficiaries when you are gone. The death benefit can be paid out as a lump sum, a monthly payment, or an annuity. Most people elect to receive their death benefit as a lump sum.

Term life insurance policies are more affordable than other types of life insurance policies and generally have lower premium costs. The average monthly premium payment for a 20-year, $500,000 policy for a healthy 35-year-old female is $24.39.

→ Learn more about term life insurance

Whole life insurance

Whole life insurance, on the other hand, is a type of permanent life insurance because it does not expire. It has a death benefit and a cash value, which is an investment-like, tax-deferred savings account that is included in the policy. The cash value accrues interest at a predetermined fixed rate. Each month, a certain portion of your premium will go into the cash value of the policy, which offers a guaranteed rate of return (the exact amount that goes into savings is determined by your individual policy). The policy's cash value grows over time and can be withdrawn when it accumulates enough value or is used for a loan.

A whole life insurance policy can cost five to 15 times as much as a term life policy for the same death benefit amount, according to Policygenius data in January 2021.

Whole life offers lifetime coverage as long as you pay the premiums. However, the cash value component makes whole life more complex than term life because of surrender fees, taxes, interest, and other stipulations.

Whole life insurance may be worthwhile if you need the cash value to cover things like endowments or estate plans, or if you have long-term dependents such as children with disabilities.

→ Learn more about whole life insurance

Term life insurance vs whole life insurance

In general, term life insurance is the best option for most people because it’s more affordable than whole life insurance. But like any insurance product, there are pros and cons to consider.

Term life insurance pros

• No hidden fees, exclusions, or risks

• Can cancel the policy before it expires without losing any value

• Most affordable option

Term life insurance cons

• Coverage expires at the end of the term, so you’ll need to shop for a new policy or convert your policy if you still need insurance

Whole life insurance pros

• Doesn’t expire, so you can keep it for as long as necessary

• The cash value component is useful for estate planning

• Works as a forced savings vehicle

Whole life insurance cons

• Five to 15 times more expensive than term

• People often buy less coverage than needed or surrender policies early due to the high cost

• Other investments offer higher interest rates

• Surrender value of the policy changes with time

→ Read our full guide on term vs whole life insurance.

Universal life insurance

Universal life insurance has a cash value, just like a whole life insurance policy. Your premiums go toward both the cash value and the death benefit. But there’s a twist: You can change the premium and death benefit amounts without getting a new policy.

Although you need to have a minimum premium to keep the policy in force, you can use the cash value to pay that 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 until the cash value is depleted.

The cash value of a universal life policy

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.

"Guaranteed Universal Life Insurance (GUL) is one of the most suitable permanent options for the everyday American," says Matt Burke, Director of Life, DI & AP Operations at Policygenius. "Someone who is looking for permanent coverage as opposed to term, or affordable coverage that lasts longer than term policies are offering, i.e. up to age 90, can benefit from Universal Life," adds Burke.

→ Learn more about universal life insurance

Indexed universal life insurance

Indexed universal life insurance (IUL) is a type of universal life insurance (UL), but the way the cash value behaves differentiates the two.

An index is essentially a group of investments like stocks or bonds. The S&P 500 and the NASDAQ-100 are examples of indexes. The insurer doesn’t directly invest in the market but uses the interest rate and performance of a specific index to set the interest rate for your policy.

Indexed universal life insurance policies have a minimum guaranteed interest rate (so you won’t lose money), but the interest rates aren’t fixed or varied like some other permanent insurance policies. However, IUL also usually has an earnings cap, meaning if the index performs better than the allotted maximum, you may miss out on the gains.

IUL policies have all the same offerings as universal life insurance policies, but the way the cash value account grows and shrinks is different. While universal life’s cash value has a variable interest rate set by the life insurance company, indexed universal life’s cash value is based on an index chosen by the insurer.

How universal life insurance and indexed universal life insurance compare to basic term and whole life insurance

Methodology: Information based on policies offered by Policygenius in 2021.

→ Learn more about indexed universal life insurance

Variable life insurance

The money paid into a variable life insurance cash value goes into 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.

It can be used as an investment option

This type of policy’s cash value is more akin to investing. While this makes variable life insurance policies a better investment option than whole life insurance policies — with potential for higher, tax-deferred growth — you can only invest in the sub-accounts available through your policy. That means you don’t get to choose from the wide variety of mutual funds that are available on the open market.

It is a riskier option

The product is also 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 in their investment. There are too many variables for the average person to manage it effectively.

All of this makes a variable life insurance policy both a limited investment option and a limited coverage option.

→ Learn more about variable life insurance

Variable universal life insurance

If it seems like variable universal life insurance is a combination of universal and variable life insurance policies, that’s because they share many of the same elements.

A variable universal life insurance policy enables you to adjust the premium and death benefit amount while investing in the policy’s cash value. But it also presents many of the same risks associated with the other types of insurance. Most people don’t need a policy with the complexities of a universal life insurance policy, so it’s recommended to explore more appropriate investment and insurance options.

You would be better off combining a cheaper term life insurance policy with 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.

→ Learn more about variable universal life insurance

How variable life insurance and variable universal life insurance compare to basic term and whole life insurance

Methodology: Information based on policies offered by Policygenius in 2021.

Final expense insurance

If term life insurance, whole life insurance, or other permanent policies aren’t a fit, but you’re still looking for a way to cover funeral or burial costs, final expense life insurance might be right for you.

Final expense insurance is a unique type of policy that covers the cost of anything associated with your death, including medical care, a funeral, or cremation.

Final expense insurance is usually attractive to older people who don’t have other life insurance coverage (maybe their term life policy expired) and don’t have enough savings to pay for their funeral, which costs $8,000-10,000 on average. Coverage is usually for small amounts, typically up to $50,000 based on policies offered by Policygenius in 2021, to cover those expenses. It’s useful if you don’t have another way to pay for your funeral and don’t want to burden your family with the costs. It’s also a good option for adult children looking to purchase life insurance for their aging parents to cover such expenses.

However, final expense insurance policies have a higher premium for a relatively low coverage amount. If you or your family can pay for a funeral through other means, that’s your best bet.

The two types of final expense life insurance policies are simplified issue and guaranteed issue.

→ Learn more about final expense life insurance

Simplified issue life insurance

Simplified issue life insurance is a type of whole life insurance that falls under the final expense category.

With simplified issue life insurance you can skip the medical exam. That’s the "simplified" part of this policy type. This is also known as a type of "no exam policy.” 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 about smoking habits and serious illnesses.

If you’re over a certain age, have severe underlying medical conditions, are unable to independently fill out the application, or are a smoker, you may not qualify for simplified issue life insurance.

Drawbacks of simplified issue

People in poor health may have to take the exam if they have too many health issues, and they could be flat-out denied by insurers. For healthier people in a hurry, it can be a way to skip scheduling the paramedical exam, which adds some time to the underwriting process. But this benefit comes with a major financial drawback: it tends to be more expensive than a term policy.

→ Learn more about simplified issue life insurance

Guaranteed issue life insurance

Guaranteed issue life insurance takes the concept of simplified issue life insurance — forgoing the health exam — a step further in that you also don’t have to answer any questions about your health. As long as you can pay the premiums and fill out the application, the insurer will cover you, only needing information about your age, sex, and state of residence. However, if an applicant cannot answer questions on the application due to advanced dementia or Alzheimer’s, then they would not qualify for guaranteed issue life insurance.

That makes it appealing for older people or people diagnosed with terminal illnesses, whose declining health makes it prohibitively expensive to get coverage with other insurance types. Guaranteed issue life insurance is useful for elderly applicants, but others can get more life insurance coverage at a lower cost with a different policy type.

→ Learn more about guaranteed issue life insurance

Group life insurance policies

Group life insurance (also called group term life insurance) is an employee benefit provided by some employers. It isn’t technically a life insurance type, but it’s important to know how it's different from privately purchased term life.

Most people think their employer-sponsored life insurance is enough coverage 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.

Group life offers low coverage amounts

Employer life insurance provides fairly low coverage, usually only equivalent to one to two years’ worth of salary. But experts, including senior operations manager of Policygenius' advanced planning team Nicholas Mancuso, suggest people aim for 10-15 times their income in life insurance coverage.

If your income is $50,000 per year, for example, you might need $500,000 or more in coverage to meet your financial obligations, but a basic group policy may only equate to $100,000 of coverage, leaving a $400,000 coverage gap.

Keep in mind that group coverage rates are based on community rates, which means as you get older (age 45 and up), group coverage becomes more expensive than buying an individual policy with the same amount of coverage.

In short, don’t automatically pass up group life insurance, but don’t dismiss other options, either. Make sure it fits your needs and see how you can work it into your private coverage.

→ Learn more about group life insurance

What type of life insurance is best for you?

Term life insurance policies are usually the best solution for most people who need life insurance. They’re generally the most affordable, simple to understand, and they provide the straightforward protection that most people shopping for a policy would want.

That doesn’t mean that other life insurance policy types are wrong for everyone. Some people tout the benefits of a permanent life insurance policy as a "forced savings vehicle”. Many people struggle to adequately save 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 otherwise get insured because of age or poor health. Final expense insurance is available for elderly consumers who don’t want to burden their families with burial costs.

You should always speak to a licensed independent broker or a financial advisor to determine the best insurance company and policy for you. They can help you weigh out the pros and cons of each type of coverage and help you buy the right type of insurance for your needs.