There are so many different options for buying life insurance but it’s really not that complicated. 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 policy. Whole life insurance, on the other hand, is a form of permanent life insurance. There are more insurance plans that fall into these two categories, each with their own benefits and drawbacks.

The different types of life insurance are:

• 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

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 life is considered the simplest, most accessible 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. The average monthly premium cost for a 20-year, $500,000 policy for a healthy 35-year-old female is around $24.

Rates are calculated for a 35-year old female non-smoker in Ohio, who qualifies for a preferred best rate class, obtaining a 20-year, $500,000 term life insurance policy. Individual rate will vary as specific circumstances will affect each customer's rate. Rate illustration valid as of 10/13/2020.

Whole life insurance

Whole life insurance, on the other hand, is considered a permanent life insurance policy because it does not expire. It has a death benefit but also 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.

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.

Whole life lasts for as long as you pay the premiums. However, the cash value component can make whole life more complex than term life because you have to consider surrender fees, taxes, and interest as well as 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.

Term life insurance vs whole life insurance

Both term and whole life insurance provide financial protection. 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.

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

Life insurance terms review

Beyond term and whole life insurance, there are several other types of permanent life insurance policies to choose from. Before we break down the important differences between these policies, let’s review some key terms you should know when shopping for 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 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.

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.

You can also adjust the death benefit within the limits outlined in your policy. Increasing it may subject you to further underwriting, while there may be fees to decrease it.

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 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, shifting premiums and death benefits are more complex than what most people need, and it comes at an added cost.

Indexed universal life insurance

What sets indexed universal life insurance (IUL) apart from universal life insurance (UL) is the "indexed" part.

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

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.

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 2020.

Variable life insurance

Variable life insurance is similar to whole life insurance in that it also has a cash value, but the way the cash value functions is quite different.

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 life insurance company.

A variable life insurance cash value is more akin to investing. The money paid into it 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.

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.

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 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 life insurance option. As an investment vehicle, variable life insurance policies provide tax-free money to beneficiaries while the policyholder is alive. Once that person dies, however, that money is retained by the insurance company. A variable policy can help cover funeral and end-of-life expenses, but other — and potentially simpler — policies do as well.

Variable universal life insurance

If you think variable universal life insurance is just a combination 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 in the policy’s cash value.

But variable universal life insurance also comes with many of the same risks as the other two. Again, this policy is more complicated than most people need, and there are better investment and insurance options available.

Instead of buying a variable universal life insurance policy, a better option is to combine 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.

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 2020.

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. It’s usually issued only to people of a certain age and the policy is valid only up to a certain age.

Like other permanent life insurance policies, there’s a cash value that can grow over time. The two types of final expense life insurance policies are simplified issue and guaranteed issue.

Final expense insurance is usually attractive to older people who don’t have other life insurance coverage (maybe they outgrew their term life policy) and don’t have enough savings to pay for their own funeral, which costs $8,000-10,000 on average. Coverage is usually for small amounts, from $5,000 to $25,000, 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.

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

→ Read our guide to the best life insurance companies for seniors.)

Simplified issue life insurance

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

Typically when you apply for life insurance, you go through a paramedical exam as part of the underwriting process so the insurer can find out how risky you are to insure. The exam helps them set your premium rate.

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 "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.

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.

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 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 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.

→ See our full cost guide to determine how much life insurance may cost for you.

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 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 other insurance types. Guaranteed issue life insurance is useful for elderly applicants, but others can likely get more life insurance coverage at a lower cost with a different policy type.

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.

Group life insurance policies

Group 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.

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-sponsored 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 means, get insured. 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. If your income is $50,000 per year, for example, you might need $500,000 or more in coverage to meet your financial obligations.

If you want more coverage, 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 dismiss other options, either. Make sure it fits your needs and see how you can work it into your private coverage.