Exploring the Types of Life Insurance: A Comprehensive Guide (2024)

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  • Permanent life insurance lasts your lifetime and accrues cash value in addition to offering a death benefit.
  • Term life lasts for a specified time and then expires, but it's cheaper than permanent life.
  • There are several types of term and permanent life policies, and some don't require a medical exam.

Life insurance is a contract between you and the life insurance company. You'll pay monthly or annual premiums for coverage. If you pass away while your policy is in effect, your insurer must pay a death benefit or your policy's proceeds to your chosen beneficiary.

Life insurance is a crucial tool to manage your risk and protect your loved ones financially. "If you don't make it home and someone relies on your income to live, you need life insurance," says Mark Williams, CEO of Brokers International.

The best life insurance policy for you depends on your budget as well as your financial goals. There are two main types of life insurance policies to choose from: permanent life and term life.

Term life vs. permanent life insurance

The difference between term life insurance and permanent life insurance is similar to the difference between renting an apartment (term life) and owning a home (permanent life).

When you rent, you have a lease for a certain amount of time. When that lease is over, you can renew it. Likewise, term insurance lasts for a specified period. When it ends, you can reapply for coverage, but your premiums will likely increase based on your age and health status.

Permanent life insurance has a death benefit for your beneficiaries and a cash value you can use during your lifetime. It's like owning a home. Like a home, you build equity in your policy, which you can use as collateral. You can also use your cash value to leave a larger death benefit to your heirs when you pass away.

Whether you choose permanent or term life insurance, you must undergo the underwriting process. During the underwriting process, your insurer gathers information about your health, job, income, finances, and other personal information to evaluate your risk level. It may require a medical exam, which includes collecting a blood and urine sample. Based on your risk level, the insurer determines your eligibility, premiums, and coverage amount.

The table below highlights the core differences between term and permanent life insurance.

Term life insurance

Permanent life insurance

  • Ends after a specified time frame
  • Includes death benefit
  • More affordable
  • Lasts your lifetime
  • Includes a death benefit
  • Cash value that can be used during your lifetime
  • More expensive than term life in the early years of the policy

Term life insurance

What is it?

The most popular type of term life insurance is a level term policy. You pay fixed premiums for a designated term—usually between ten and 30 years—for a fixed death benefit. If you die during your term, your beneficiaries receive a death benefit. If you outlive your policy and pass away without renewing your coverage, your beneficiaries won't receive a death benefit.

There are also other types of term life insurance policies, some more popular or expensive than others. Take a look at the list below for the top term life policies and their features.

  • Annual yearly renewable (ART): This policy provides coverage one year at a time up to a specified age, without an additional medical exam. However, premiums increase each year as you age.
  • Return of premium: Returns part or all of the money you've already paid if you haven't used the policy once your term ends. You'll pay an extra premium for this feature.
  • Convertible term life: This allows you to convert a term life policy into permanent life insurance without additional evidence of insurability.

Who is it best for?

Term life insurance provides coverage for a certain amount of time. This makes it suitable for most applicants, as most people's financial obligations decrease as they age. It's also the most affordable life insurance policy, making it accessible to most individuals. You can find our guide on the best term life insurance here.

Whole life insurance

What is it?

Whole life insurance is a lifelong or permanent policy in which you pay a fixed premium for a guaranteed death benefit. The insurance company saves a portion of your premium in its own portfolio to increase your policy's cash value. Since whole life insurance offers many guarantees, it's one of the costlier life insurance policies.

Who is it best for?

Whole life insurance is an excellent option if you need long-term coverage, like if you have lifelong dependents or are a business owner. If you'd like to build a tax-free legacy for your dependents with little to no market risk, a whole life policy may be the way to go. You can find our guide on the best whole life insurance here.

Universal life insurance

What is it?

Universal life insurance allows more flexibility than a whole life policy. You can raise or lower your death benefit, which increases or decreases your premiums based on your financial situation and needs. For example, if you find that you need less coverage because your children are grown up and your mortgage is almost paid off, you can lower your death benefit. As a result, this decreases your premiums.

Who is it best for?

If you'd like lifelong coverage, steady cash value growth, and flexibility in your premium payments and coverage amounts to align with changing financial needs, universal life insurance could be the perfect policy for you. You can find our guide on the best universal life insurance here.

Variable life insurance

What is it?

Variable life (VL) insurance policy, a type of permanent life insurance, was created years after universal life for people who didn't like how whole and universal life commingled their investments with the insurance company.

Your money is invested in subaccounts that track underlying mutual funds, bonds, and stocks. If the market does well, so do you. If the market falls, so does your cash value, making it riskier than whole and universal life.

Who is it best for?

VL insurance is best for someone who wants control over how their cash value is invested and can tolerate increased market risk for higher returns. Since life insurance policies tend to yield subpar returns, VL may be best suited for high-net-worth investors who have maxed out other tax-advantaged investment vehicles (i.e., 401(k)s, Individual Retirement Accounts (IRA)s, etc.).

Variable universal life insurance

What is it?

Variable universal life (VUL) insurance is a combination of universal and variable life insurance. You can raise or lower your death benefit and have your cash value invested in subaccounts that mirror the performance of underlying investments. Again, this is risky, but if the market does well, so does your cash value.

Who is it best for?

Like a VL policy, VUL is best for those who want lifelong coverage, more investment options, and the ability to weather increased risk for higher returns. It's also suitable for those hat want flexible premium payments and coverage amounts. You can find our guide on the best universal life insurance here.

Simplified issue life insurance

What is it?

Simplified issue life insurance doesn't require a medical exam, but you still have to complete a health questionnaire and provide access to medical records. If you fail to disclose a condition and die, your insurance company can deny death benefits to your beneficiaries.

It's worth noting that some insurance companies enforce graded death benefits, which refers to your insurer withholding your full death benefits for the first few years of coverage.

Who is it best for?

Simplified issue life insurance is suitable for applicants of all ages with mild to moderate medical conditions (e.g., asthma, obesity, mental health issues, etc.) You can find our guide on the best no exam life insurance.

Guaranteed issue life insurance

What is it?

Guaranteed issue life insurance is easier to obtain because it doesn't require a medical exam or health questionnaire. However, it has several drawbacks. One of those drawbacks is you must be 50 and older to apply. Plus, since this policy is catered towards high-risk applicants, premiums are usually higher, and coverage amounts are limited.

Guaranteed issue life insurance is also known as final expense insurance since it offers low death benefit amounts and tends only to cover funeral and burial expenses.

Who is it best for?

Guaranteed issue life insurance is a viable option for individuals who struggle to obtain traditional life insurance, like seniors, smokers, and applications with chronic, severe, terminal illnesses or multiple health conditions. You can find our guide on the best life insurance for seniors here.

Group life insurance

What is it?

Group life insurance is employer-provided life insurance, usually offered for free as part of the company's benefits. However, if you are discharged, retire, or quit, you will lose coverage. Plus, group life insurance usually has limited coverage amounts and options compared to private life insurers.

Who is it best for?

Consider group life insurance if you're employed with a company that offers this benefit and you anticipate staying with the company in the long run.

Choosing the right type of life insurance

The best life insurance policy for you depends on your budget and financial situation. If you have a fixed income with temporary needs, term life insurance may be best for you. If you have health issues that may prevent you from traditional coverage, you may want to consider no medical examination life insurance. If you want coverage for your dependents in the event of your untimely death, then a term life policy works. If you want to build wealth and leave a legacy, a permanent life insurance policy is best.

Your life insurance needs will change as you age, and you'll need to consider children, marriage, divorce, retirement, and caring for aging parents. Consider consulting a financial advisor, estate attorney, and accountant to ensure you have the proper coverage for your goals and life changes. Also, talk to your insurance agent or financial planner about what works best for you and your budget based on your financial situation.

Types of insurance FAQs

What's the main difference between term and whole life insurance?

Term life insurance provides coverage for a certain period of time (usually ten to 30 years). Whole life insurance offers lifelong coverage along with a cash value component.

Can I switch from term to whole life insurance?

Many term policies have built-in term-to-perm conversion options. If not, you can include it as a rider or an add-on to your policy at an additional premium. This allows you to convert your term policy to a whole life policy without undergoing an additional medical exam or health questionnaire.

How do investment components work in life insurance policies?

Policies like variable life and variable universal life insurance insurance allow policyholders to invest the cash value in separate accounts that track underlying investments, This offers the potential for growth but exposes you to market volatility, increasing your risk.

Is it worth getting life insurance with no medical exam?

If you don't qualify for traditional life insurance, no medical exam policies like simplified issue or guaranteed issue may be an option. However, these policies tend to have higher premiums and lower coverage amounts.

How do I choose the right type of life insurance?

Consider your financial goals, coverage needs, budget, and any current or potential health issues. Work with a financial advisor for personalized guidance on your individual situation.

Ronda Lee

Ronda Lee was formerly an associate editor for insurance at Personal Finance Insider covering life, auto, homeowners, and renters insurance for consumers. Before joining Business Insider, she was a contributing writer at HuffPost with featured articles in politics, education, style, black voices, and entrepreneurship. She was also a freelance writer for PolicyGenius. She worked as an attorney practicing insurance defense and commercial litigation.

Lina Roby

Insurance Editor, LIA, MLO

Lina Roby (she/her) was a Personal Finance Insurance editor at Insider. She covered pet, travel, auto, and other common insurance products. She is also a licensed property & casualty insurance agent. Her goal is to help readers make informed decisions for all their insurance needs and plan for the unexpected, especially in a constantly evolving insurance marketplace. As a licensed insurance agent, she worked closely with clients and insurance carriers to quote and bind homeowners, auto, liability, and other insurance plans for personal and business. As a licensed mortgage loan originator, she was also able to more effectively quote and bind homeowners insurance policies meeting mortgage lender requirements. With a love for writing, she has also assisted with marketing for her local insurance marketplace.

Alani Asis

Personal Finance Reviews Fellow

Alani Asis is a Personal Finance Reviews Fellow who covers life, automotive, and homeowners insurance. Prior to Insider, Alani was a Mortgage Support Specialist and a personal finance freelance writer based in Hawai'i. You can reach her via email at aasis@businessinsider.com or through Twitter @AlaniAsis.

Exploring the Types of Life Insurance: A Comprehensive Guide (2024)

FAQs

Exploring the Types of Life Insurance: A Comprehensive Guide? ›

Life insurance products are often grouped into two main types: term and permanent. Term life insurance policies last for a set period, while permanent life insurance provides lifetime coverage and can accrue cash value. Generally, term life insurance is more affordable than permanent coverage.

What are the different types of life insurance and how do they differ? ›

Compare Different Types of Life Insurance
Type of life insurancePolicy lengthDeath benefit
Universal lifePermanentMight be flexible
Variable life/variable universal lifePermanentMight fluctuate
Burial lifePermanentFixed
Survivorship lifePermanent, typicallyPaid out after second person dies
5 more rows
Jun 27, 2023

What type of life insurance does Dave Ramsey recommend? ›

Wondering what Ramsey teaches about life insurance? This article covers all the types, but let's cut to the chase: we always recommend buying term life. In particular, you want a policy that lasts 15 or 20 years with coverage that's 10-12 times your annual income.

What is a comprehensive life insurance policy? ›

In case of death of the insured individual during the policy term, the death benefit is paid by the company to the beneficiary. A comprehensive plan is a life insurance product that gives benefits over and above a life cover/death benefit. It also protects you through a critical illness cover.

What are the 4 types of insurance everyone should have and explain each of them? ›

Life insurance will help provide financially for your survivors. Health insurance protects you from catastrophic bills in case of a serious accident or illness. Long-term disability protects you from an unexpected loss of income. Auto insurance prevents you from bearing the financial burden of an expensive accident.

What is the best type of life insurance to get? ›

A whole life policy is generally considered the most secure form of insurance. Whole life policies have more rigid premium payment requirements than universal life policies. As long as scheduled premium payments are paid, the cash value is guaranteed to increase each year.

What type of life insurance gives the greatest amount? ›

Term insurance is initially cheaper than other types of policies that offer the same amount of protection. Therefore, it gives you the greatest immediate coverage per dollar.

What Suze Orman says about life insurance? ›

Suze Orman recommends that generally most people should get a 20 year term life insurance policy at 20 times your annual income. What does that mean? That means if you're 30 years old and you make $50,000 a year you should get a million dollar 20 year term life insurance policy.

What's better, term or whole life? ›

The pros and cons of term and whole life insurance are clear: Term life insurance is simpler and more affordable but has an expiration date and doesn't include a cash value feature. Whole life insurance is more expensive and complex, but it provides lifelong coverage and builds cash value over time.

At what age should you stop buying term life insurance? ›

Life insurance can provide peace of mind at any age, but isn't always necessary after age 60. To see if you need life insurance, assess your family's needs, your financial resources and assets, your outstanding debts and your long-term financial goals.

What are the different types of whole life insurance? ›

Whole life insurance has several variations, including limited payment, modified, single-premium, and variable whole life. Different types offer alternative payment options or investment methods.

How many different types of basic life insurance are there? ›

For the most part, there are two types of life insurance plans - either term or permanent plans or some combination of the two. Life insurers offer various forms of term plans and traditional life policies as well as "interest sensitive" products which have become more prevalent since the 1980's .

What are the two types of permanent life insurance and how are they different? ›

The two primary types of permanent life insurance are whole life and universal life. The cash value of whole life insurance grows at a guaranteed rate. Universal life insurance also contains savings and a death benefit, but it features more flexible premium options and its earnings are based on market interest rates.

What is the main difference between whole life insurance and variable life insurance? ›

The cash value of a whole life policy earns a fixed, relatively low rate of interest similar to a savings account or money market, and the death benefit is guaranteed. A VLI policy has more flexibility, giving you the option to invest that cash value in securities such as mutual funds.

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