Types of Life Insurance Policies

Term life insurance

Pros: Affordability, simplicity
Cons: Temporary coverage, no cash value
Good for: Most people

Appropriate for most consumers, term life insurance offers a death benefit for a set premium and will only provide a payout if your death occurs during a designated “term.” (There is a very specific type of term insurance that offers a decreasing death benefit over time, but this is rarely used.)

Term life insurance is usually issued for terms that range from 10 to 20 years, which can provide security during some of life’s most exciting, but also vulnerable, times — say, while you’re paying off debts, raising children, or caring for elderly family members. One of the advantages of term life insurance is its affordability compared to your other options. Premiums can range from around $10 to $30 per month for a healthy 20- to 30-year-old and from $40 to $50 per month for a healthy 40- to 50-year-old. This relative affordability is important to factor into your decision if you’re currently juggling meeting your expenses and other financial goals.

If you still need coverage once you reach the end of your policy’s term (first of all, that’s awesome, you’re alive!), you can renew your policy or convert it to a permanent life insurance policy. One thing to keep in mind, however, is that if your health condition has changed, coverage may be more expensive or unavailable when you go to renew.

Permanent life insurance

Permanent life insurance is designed to cover you until you die, as long as you’ve been paying your premiums. Permanent life insurance does have a maturity date where the cash value will be paid out as an endowment — typically around age 95 to 121 — but these policies are generally expected to outlive you.

Another key difference between permanent and term life insurance is that permanent life insurance policies are much more expensive. When you’re young, your life is a lot cheaper to insure, but permanent life isn’t just taking on the risk of you dying young; it’s taking on the risk of you dying at all, which, even with modern medicine, is 100%.

Instead of charging you more and more each year as your true risk of dying increases, companies design premiums to even out the cost across your lifetime. In fact, insurers write policies that require you to overpay so much in your early life that, by law, a portion of that overpayment has to be available to you if you leave your plan. This means that most permanent life insurance offers not only a death benefit, but also a cash value component.

There are several common types of permanent life insurance:

Whole life insurance

Pros: Cash value component, lifelong coverage
Cons: Expensive
Good for: Consumers adding it as a piece of a larger financial plan

Whole life insurance offers the most consistent type of permanent life insurance coverage. With this kind of policy, you enter a contract that will pay out a defined death benefit as long as you pay a set premium to keep the policy in force.

As you pay your premiums, the cash value of your policy grows based on dividends that come from the insurer, so if you decide to discontinue your coverage, you may be able to take that money with you. You can also borrow against the value of that account, but not against the face value, or death benefit, of your policy. The built-in savings function of whole life insurance, although expensive, makes it an appealing type of life insurance for people looking to add this coverage as part of a broader, complex financial plan.

Universal life insurance

Pros: Flexibility, relatively stable investment
Cons: Currently returning low interest rates
Good for: People nearing retirement

Universal life insurance also allows you to take out loans against the cash value of your policy, but this account is treated much differently than whole life. Also called adjustable life insurance, this type of policy invests the cash value of your policy, typically earning a money market rate of return. This type of policy was created for a high-interest climate (hint: That’s not what we’re in right now). When it was introduced in 1980, money market rates were in the low teens, but they have now dropped to 1% to 2%.

Importantly, you can also alter the death benefit and premiums in this type of policy. This can provide flexibility during financial challenges by allowing you to use the cash value of the policy to cover some or all of your premium payments, but you also risk your policy lapsing if that cash value runs out. While this may not be a very attractive policy for most in 2019, the NAIC reports that people close to retirement have been turning to this type of policy as an addition to financial plans.

Guaranteed universal life insurance

Pros: Affordable yet lifelong coverage
Cons: No cash value component
Good for: People who want the stability of whole life insurance

Guaranteed universal life combines some of the stability you get from whole life insurance with the simplicity of term life insurance. Like with whole life, if you pay your premiums, you can’t lose your death benefit or have it decrease. Like term, there is also no expensive cash value component. However, this means that there’s no underlying savings account if you decide to discontinue your coverage or want to borrow from it during your life.

Variable life insurance

Pros: Flexibility, tax-sheltered investment opportunity
Cons: Risk losing cash value
Good for: Investors looking for investments to add to their portfolio

Variable life insurance was created to add more risk and reward opportunity than universal life insurance. Under this type of policy, you are able to invest the cash value of your coverage into higher-risk stocks and, because this is an insurance policy, any gains would not be taxable as income that year. Although you can’t lose the death benefit if your cash value drops, you do risk paying high prices for the cash value component without taking advantage of it.

Variable-universal life insurance

Pros: Flexibility, opportunity for growth
Cons: Higher risk
Good for: People looking for the highest level of flexibility in coverage and cash value management

Variable-universal life insurance is, as it sounds, a hybrid between universal and variable life insurance. The most flexible option, variable universal life insurance allows you to invest the cash value of your policy in more risky assets like stocks and bonds (rather than at a money market rate of interest) while still being able to change the death benefit and premiums of your policy. Keep in mind this is an option that offers plenty of flexibility and potential for upside, but it also involves higher risk, so it is not a strong option for people looking for stability.

No-exam or simplified issue

Pros: Convenient, easy
Cons: Potentially more expensive
Good for: People looking for convenience over cost, those with preexisting health conditions

No-exam or simplified issue life insurance is available for both term and whole life policies. Unlike a traditional underwriting process for life insurance, you’re not required to take an exam for this kind of coverage. This makes it an attractive option for those looking for convenience, or for those with an existing health condition, but it might mean you end up paying more for your policy. When insurers are missing information about your health which could tell them how risky you are to insure, they use higher premiums to compensate. This type of coverage also limits how much coverage you’ll be able to get, which is important to consider if you’re looking for a large amount of protection.

Final expense life insurance

Pros: Cheaper (in total) than full coverage
Cons: More expensive (by value) than full coverage
Good for: Someone who doesn’t need a full coverage but wants to cover their burial costs

Final expense life insurance was created simply as a way to cover the expenses immediately following your death. This could include burial expenses such as a coffin, funeral, and headstone, or it could extend to outstanding debts. Typically written for people between 45 and 85 years of age, this type of policy does not require you to do a physical exam for underwriting. Premiums mostly depend on age, but compared to other types of life insurance, it doesn’t offer nearly as much coverage for the amount you’ll pay in premiums.

What’s Next?

Interested in finding a term life insurance policy? Read our review of the best term life insurance companies.
Ready to search for whole life insurance coverage? Check out our review of the best whole life insurance companies.
Looking for more information on common additional life insurance coverages? Find out what to know about life insurance riders.

About the Authors

Samantha Kostaras Insurance Reporter

Samantha Kostaras is an insurance reporter who covers personal finance and insurance. After a degree in finance from the University of Alabama and stint at Morgan Stanley, she worked as a financial analyst before becoming a journalist. Her writing has appeared in The Simple Dollar, Reviews.com, Coverage.com, and elsewhere.

Types of Life Insurance Policies

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