Types of life insurance
Explore your term and whole life insurance options
Life insurance can help keep your beneficiaries financially secure after you die, but it's crucial to understand the many different kinds of life insurance policies and their features and terms. We’ve summarized your main options to help you find the right one for your needs.
Term life insurance policies
Term life insurance only pays out if you (the policyholder) die within a specified period. This “term” is a set time frame that’s usually between one and 30 years.
Term life insurance is the simplest form of life insurance, and it’s often a great option if you’re looking to avoid leaving a loved one with significant debt. You pay a fixed premium throughout the term, and in return, your beneficiary can get anywhere from $10,000 to $500,000 (or more) when you die.
Eligibility is usually based on medical exams and your age.
Pros
- Less expensive
- Flexible term lengths, premiums and features
Cons
- Coverage expires after a set number of years
- Usually requires a medical exam
Whole life insurance policies
Whole life insurance, also called permanent life insurance, remains in place until you die as long as you continue to make premium payments on it. Whole life insurance policies provide death benefits that are as flexible as those offered by term life policies, if not more so.
With some whole life insurance policies, your premiums build cash value that you may be able to borrow from or use to fund your retirement.
Pros
- Builds cash value over time
- Can remain in place until you die
Cons
- More expensive than term policies
- Usually requires a medical exam
Universal life insurance policies
Universal life insurance, also called adjustable life insurance, is another type of permanent life insurance that also builds cash value. With one of these policies, part of your premiums goes towards the death benefit while the other part goes towards building up a cash value account that generates interest.
Eventually, you can adjust where these funds are going. For example, as your cash value grows, you can use it to pay your premiums for you. However, this may drain your cash value account and result in a lapsed policy, ending your coverage.
Pros
- Builds cash value over time
- Can remain in place until you die
- Interest can pay premium costs
Cons
- Growth is dependent on market conditions
- More expensive
- Risk of lapsed coverage
Variable life insurance policies
Variable life insurance is also a type of permanent life insurance. However, the money you pay into this policy’s savings account can be used to buy stocks, bonds and money market mutual funds. These investments have greater growth potential than a cash value account, but they have more risk as well. Some policies have limitations to reduce risk, but they can’t prevent you from losing money.
Variable life insurance policies can be a good option depending on your long-term goals and your age. Younger people may benefit from these policies more because they have time to ride out the ups and downs of the market. Before choosing this type of life insurance policy, you should know a bit about investing or, if possible, work with a financial advisor.
Pros
- Can be used to invest
- Can remain in place until you die
- Higher growth potential
Cons
- More expensive
- Higher risk
- Death benefit may decrease
Simplified issue life insurance policies
Simplified issue life insurance, also called simplified whole life insurance, is a type of final expense insurance often used by people who can’t qualify for other types of life insurance.
Simplified issue life insurance generally doesn’t require a medical exam, so it can be a good option for older people or those with preexisting conditions. You’ll probably have to answer a few basic medical questions (“Do you smoke?”, etc.), but the medical info you must supply is much less detailed.
The downsides are that these policies often have smaller death benefits (between $2,000 and $50,000) and relatively high premiums. This type of policy usually isn’t available until you’re 45 to 50 years old.
Pros
- Helps pay for end-of-life expenses
- Good for those who can’t get other policies
Cons
- Limited benefits
- Relatively high premiums
Guaranteed life insurance policies
Like simplified issue life insurance, guaranteed life insurance is another form of final expense insurance. However, these policies go a step further and guarantee coverage if you are within the age range (usually at least 50 years old), no matter your medical history.
However, there may be a delay between when you get your policy and when you obtain full coverage (i.e., when your beneficiaries can receive the full death benefit). This is called a graded death benefit, and it may limit how much your loved ones can receive for two to three years after you sign up.
Pros
- Helps pay for end-of-life expenses
- You can’t be turned down if you’re within the age range
Cons
- Coverage may be graded
- Even higher premiums
Group life insurance policies
You can only purchase group life insurance with other people, usually coworkers or other members of a professional organization. There are some risks and limitations, but most term life insurance policies are more accessible through group policies than if you applied on your own.
Policy details, including the type of coverage and benefits, range widely and should be carefully considered before you sign up. You may also lose access if you’re no longer part of the group in question or switch jobs.
Pros
- Often more affordable
- Can be good for those with preexisting conditions
Cons
- Limited flexibility
- Only available to members of participating groups
Life insurance FAQ
What are the two main types of life insurance?
- Term life insurance: A term life insurance policy provides coverage for a set number of years. If you have a limited budget or are looking for coverage for a set number of years, term insurance may be right for you.
- Whole life insurance: Whole life, or permanent life, insurance can last as long as you pay your premiums. Two subtypes, variable and universal life insurance, can help you grow your money as well. If you can’t qualify for other whole life insurance policies and want to cover your end-of-life needs, simplified issue or guaranteed life insurance may be your only options.
Neither type of life insurance is universally better, so compare coverage terms and features to find a policy that fits your lifestyle and goals.
What is the most basic form of life insurance?
What is the most common life insurance?
Which type of life insurance is better: term or cash value?
- Term life insurance is more affordable, but it expires after a set number of years.
- Whole life insurance is more expensive, but it remains in place as long as you continue to make payments and sometimes offers cash value incentives.
Bottom line: What is the best type of life insurance for me?
The best life insurance company for you depends on a lot of factors, including your age, budget and financial goals. Take the time to compare different types of life insurance to find the policy that fits your needs.
The right life insurance policy can protect your loved ones when you’re no longer around, so it’s worth putting in the extra time to determine which policy provides them with the help they’ll need.
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Article sources
ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. To learn more about the content on our site, visit our FAQ page.
- Insurance Information Institute (III), “What are the principal types of life insurance?” Accessed September 7, 2021.
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