Types of Insurance

Types of life insurance
With so many different types of life insurance, you may be wondering which one to choose. We’re here to help you make that decision.

Colin Lalley 1600Amanda Shih author photo
Colin Lalley & Amanda Shih
Published July 16, 2020

KEY TAKEAWAYS

The two main types of life insurance are term and whole life insurance

Some types of life insurance come with a cash value amount that works like savings or an investment account

Other policies allow you to skip the medical exam or pay for specific end-of-life expenses

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

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
Variable life insurance
Variable universal life insurance
Simplified issue life insurance
Guaranteed issue life insurance
Final expense insurance
Group life insurance
The bottom line
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Term life insurance vs whole life insurance
Term life insurance lasts for a set 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 premium), you’re paying for the death benefit that goes to your beneficiaries in the event of your death. 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, usually costing $30-40 a month for a 30-year, $500,000 policy for healthy people in their 20s and 30s. The policy expires at the end of the term, which can last up to 30 years.

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 a 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.

Due to the fees and the extra feature, a whole life insurance policy can cost five to 15 times as much as a term life policy for the same death benefit amount.

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.

Still, it may be worth it if you need the cash value to cover things like endowments or estate plans, which might benefit from the greater options that a whole life policy provides.

Read our full guide on term vs whole life insurance.

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Still, there are some key differences in the various types of permanent life insurance policies, so they’re worth talking about further.

Life insurance terms review
Term life insurance A popular life insurance policy option. These have a set expiration date and are a cheaper, more popular option.
Whole life insurance A form of permanent life insurance that has a premium and cash value. These are typically more expensive and complex, but can satisfy specific needs, like large estates or inheritances.
Death benefit The amount paid to beneficiaries when a policyholder dies.
Beneficiary The person(s) who receive the death benefit. They are selected by the policyholder.
Premium The regular payment made toward the insurance policy. These are typically monthly.
Cash value A tax-deferred savings account that is included in permanent life insurance policies.
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.

Basically, 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.

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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 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.

FEATURES BASIC TERM LIFE INSURANCE BASIC WHOLE LIFE INSURANCE UNIVERSAL LIFE INSURANCE
Duration 1-30 years Life Life
Guaranteed death benefit Yes Yes Yes
Guaranteed cash value N/A Yes Protected from risk, but accrued interest can be used to pay premiums
How cash value grows (or shrinks) N/A Earns interest at a predetermined fixed rate Variable rate determined by the insurer
Premiums Can increase periodically or stay at a guaranteed level for the policy duration Level Varies, up to the customer (subject to federal tax laws)
Notes No risk of losing coverage, but no cash value when term ends No risk compared to other permanent types, but you may find better investment options elsewhere N/A
Variable life insurance
Variable life insurance is similar to whole life insurance in that they both have a cash value, but the functions of the cash values are 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. 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 insurance 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 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’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. As an investment vehicle, variable life insurance policies provide tax-free money to beneficiaries during the time that 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 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 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 it isn’t your best investment or insurance option.

The better option is a combination of a simple, cheaper term life insurance policy and 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.

FEATURES VARIABLE LIFE INSURANCE VARIABLE UNIVERSAL INSURANCE
Duration Life Life
Guaranteed death benefit Yes Yes
Guaranteed cash value No No
How cash value grows (or shrinks) Subaccounts – pool of investor funds offered by the insurer Subaccounts – pool of investor funds offered by the insurer
Premiums Level Varies, up to the customer (subject to federal tax laws)
Notes Risk of ending up with expensive insurance policy with little-to-no cash value Risk of ending up with expensive insurance policy with little-to-no cash value
Simplified issue life insurance
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 like if you smoke, have been diagnosed with serious illnesses, and so on.

People in poor health may have to take the exam if they have too many health issues, and they could flat-out be 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 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 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.

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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. In order to cover the costs of an average funeral, you’d have to pay more than $200 a month for around $10,000 of coverage.

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 specifically for that purpose.

Final expense insurance is a unique type of policy. It covers the cost of anything associated with your death, whether it’s medical costs, a funeral, or cremation — whatever your literal final expenses are. 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. 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 life 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 life insurance premiums for a relatively low coverage amount. If you or your family are able to pay for a funeral through other means, that’s your best bet.

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 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, 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.

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

That doesn’t mean that other life insurance policy types are wrong for everyone. Some people tout the benefits of permanent life insurance policies as a “forced savings” for people. 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 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 the best insurance company and policy 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.

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