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Types of life insurance

Term and whole are the two main types of life insurance, but there are a few other options to consider before buying a life insurance policy.

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Shopping for life insurance can seem overwhelming, but deciding which type of policy you need is simple. There are only two main policy categories to choose from: term life insurance and permanent life insurance. Term life insurance (the most popular type of life insurance) lasts for a specific amount of time, while whole life insurance (the most popular type of permanent coverage) lasts your entire life.

Once you decide between term and permanent coverage, you’re already halfway to the finish line. We’ll explain the differences between the two, as well as the options within so you can choose the one that suits you best.

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Key Takeaways

  • Term life insurance is the simplest and most affordable option for most people. 

  • Whole, universal, and variable life insurance are all types of permanent life insurance.

  • Some types of permanent life insurance come with a cash value amount that works like an investment account.

  • Some types of life insurance policies are categorized based on medical underwriting or the lack thereof, such as guaranteed issue life insurance.

Term life insurance

Term life insurance lasts for a set number of years before it expires. You pay premiums toward the policy, and if you die during the term, a set amount of money, known as the death benefit, is paid to your designated beneficiary. 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 to avoid taxes.

  • Benefit: affordability Term life insurance policies are less expensive 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 $25.56.

  • Downside: length Term life insurance has an expiration date, which can align with a mortgage or when your children graduate college. Those looking for lifelong coverage should opt for permanent life insurance instead.

  • Who it’s for: most life insurance shoppers Those looking for cheaper life insurance for up to 30 years should buy term life insurance.

→ Learn more about term life insurance

Whole life insurance

Whole life insurance is the most popular type of permanent life insurance. It also pays out a death benefit, but unlike term life, most policies have a cash value, an investment-like, tax-deferred savings account, included in the policy. 

  • Benefit: cash value & lifelong coverage The cash value component can cover endowments or estate plans. And since this coverage lasts for your entire life, it can help support long-term dependents such as children with disabilities.

  • Downside: cost & complexity A whole life insurance policy can cost 5 to 15 times as much as a term life policy for the same death benefit amount, based on Policygenius data in January 2022. The average monthly premium payment for a $500,000 whole life policy for a healthy 35-year-old female is $433. The cash value component makes whole life more complex than term life because of fees, taxes, interest, and other stipulations. 

  • Who it’s for: younger buyers who can pay more People who anticipate lifelong dependents or a need for permanent insurance with minimal complexities can benefit from whole life. 

→ Learn more about whole life insurance

Universal life insurance

There are three types of universal life insurance (UL): indexed universal life insurance (IUL), guaranteed universal life insurance (GUL), and variable universal life insurance (VUL). All have a cash value, just like a whole life insurance policy. Your premiums go toward both the cash value and the death benefit. 

Unlike whole life insurance, universal life insurance allows you to decrease (or increase) how much you pay towards premiums (flexible premiums) and allows for adjustable death benefits. If you decrease how much you spend on premiums, the difference is withdrawn from your policy’s cash value. 

Indexed universal life insurance

Indexed universal life insurance is the most popular type of UL. The cash value account has a minimum (and maximum) guaranteed interest rate based on a stock market index (like the S&P 500), chosen by the insurer.

  • Benefit: cash value gains
    There’s a potential to see bigger gains in the cash value account compared to other permanent life insurance policies, depending on stock market performance.
  • Downside: investment caps
    Most insurers set limits on cash value gains. You won’t lose your base cash value, but dedicated investment accounts will offer higher returns. 
  • Who it’s for: portfolio enhancers
    If you’ve maxed out other investment accounts or are looking for a relatively safe investment with guaranteed minimum values IUL might be right for you.

Guaranteed universal life insurance

Guaranteed universal life insurance (GUL) is universal life insurance without the market risk. Your premiums stay the same regardless of how market indexes perform, as your plan’s interest rates are baked into the premiums when you sign up for the policy. This type of life insurance has a “no-lapse” guarantee, meaning that as long as you pay your premiums, you’ll have coverage.

  • Benefit: stability
    Guaranteed universal life insurance provides lifelong coverage without the market fluctuations of indexed or variable policies. 
  • Downside: no cash guarantee
    Unlike some permanent life insurance, GUL doesn’t allow for premium payments from the cash value account. If you skip a premium payment, your policy will lapse.
  • Who it’s for: risk-averse people with permanent insurance needs
    Guaranteed universal life insurance is a relatively affordable permanent option.

Variable universal life insurance

Variable universal life insurance has a variable interest rate set by the life insurance company. Cash value is invested in mutual funds that can increase or decrease. It shares elements from universal and variable life insurance policies.

  • Benefit: cash value gains
    There’s a potential to see bigger gains in the cash value account compared to other permanent life insurance policies, depending on your investment choices. 
  • Downside: too hands-on
    The policyholder, not the insurance company, manages the investment portfolio. Unlike other types of permanent insurance, you’ll need to manage your own cash value investments or work with a separate financial advisor.
  • Who it’s for: DIY investors
    There’s a big potential upside for policyholders who don’t mind being involved in money management. 

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

  • Benefit: savings potential Similar to variable universal life insurance, policyholders can see greater cash value gains with this type of policy over other permanent products.

  • Downside: high risk for policy lapse Both the cash value and death benefits can fluctuate based on your portfolio's performance.

  • Who it's for: hands-on investors who don't mind risk

→ Learn more about variable life insurance

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Final expense insurance

There are two types of final expense life insurance, which fall under the whole life insurance category: simplified issue life insurance and guaranteed issue life insurance.

Simplified issue life insurance

Simplified issue life insurance allows you to fill out a health questionnaire and skip the medical exam. This is also known as a type of no-medical-exam policy.

  • Benefit: burial costs
    This type of insurance covers the cost of anything associated with your death, including medical care, a funeral, or cremation. 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. 
  • Downside: price & health limitations
    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.   
  • Who it’s for: seniors without major medical issues
    It’s also a good option for adult children looking to purchase life insurance for their aging parents to cover final expenses.

Guaranteed issue life insurance

Guaranteed issue life insurance skips both the medical exam and the health questionnaire. As long as you can pay the premiums and fill out the application with info about your age, sex, and residency, the insurer will cover you. 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.

  • Benefit: burial costs
    Guaranteed issue offers similar benefits to simplified issue policies.
  • Downside: price
    Like other types of final expense life insurance, these policies have higher premiums for relatively low coverage amounts (typically up to $50,000). 
  • Who it’s for: seniors or people with terminal illnesses
    For older people or those with declining health, guaranteed issue life insurance might be the only option available.

→ Learn more about final expense life insurance

Group life insurance policies

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

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.

→ Learn more about group life insurance

How the types of life insurance stack up 

Life insurance typeDurationDeath benefitPremiumCash value
Term life insurance10 to 30 yearsFixedLevel*No
Whole life insuranceLifeFixedLevelYes; guaranteed
Universal life insuranceLifeAdjustableFlexibleYes; guaranteed
Variable life insuranceLifeVariableLevelYes; not guaranteed
Final expense life insuranceLifeFixedLevelNo
Group term life insurance1 yearFixedLevelNo

*Increasing and decreasing premium term life insurance policies also available.

What type of life insurance is best for you?

Term life insurance policies are usually the best solution for most people who need affordable life insurance for a specific period in their life. Permanent life insurance policies including whole life insurance are best for people who can pay more and want life insurance that will never expire. 

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 and 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 the pros and cons of each type of coverage and help you buy the right type of insurance for your needs.

Frequently asked questions

What types of life insurance are there?

The main two categories of life insurance are term life insurance (which lasts for a set term) and permanent life insurance (which never expires). Whole, universal, indexed universal, variable, and final expense are all types of permanent life insurance. Permanent life insurance typically comes with a cash value and has higher premiums.

Which type of life insurance policy combines insurance and investing?

The cash value component of permanent life insurance policies can be used to save or invest. But because cash value policies have more expensive premiums, limited investment options, and offer relatively low rates of return, they should not be used as a primary savings vehicle.

What kind of life insurance should I get?

The right life insurance policy for you depends on your financial situation and your dependents. Term life insurance is the best choice for most people because it’s more affordable, but whole life insurance makes sense for people who need lifelong coverage or those looking for insurance with a cash value.