Five types of life insurance policies you may encounter more frequently include term life insurance, whole life insurance, universal life insurance, variable life insurance, and burial or final expense life insurance.
The two basic types of life insurance policies are term life insurance and permanent life insurance. Term life – the most popular type of life insurance – lasts for a specific number of years (usually between 10 and 30) while permanent life insurance lasts your entire life. All other types of life insurance fall into one of these two main categories.
The right policy for you will depend on your personal circumstances, how much coverage you need, and how much you want to pay for it. This guide covers the most common types of life insurance policies on the market, including information on how they work, their pros and cons, how long they last, and who they’re best for.
Term life insurance
One of the two main types of life insurance is term life. This is the most popular type of life insurance for most people because it’s affordable, only lasts for as long as you need it, and comes with few tax rules and restrictions.
Term life insurance is one of the easiest and cheapest ways to provide a financial safety net for your loved ones.
How it works: Term life insurance lasts for a set number of years before it expires. You pay premiums toward the policy, and if you die during the term, the insurance company pays a set amount of money, known as the death benefit, to your designated beneficiaries. The death benefit can be paid out as a lump sum or an annuity. Most people choose to receive the death benefit as a lump sum to avoid paying taxes on any earned interest.
Pro: Affordability – term policies are less expensive than other types of life insurance and generally have lower premiums.
Con: Length – term has an expiration date, which can align with a mortgage or when your children graduate college. If you’re looking for lifelong coverage, you should opt for permanent life insurance instead.
Best for: Most life insurance shoppers. Those looking for cheaper life insurance for up to 30 years or longer should buy term life insurance.
Whole life insurance
Whole life insurance is the most popular type of permanent life insurance because of its simplicity and lifelong duration. Its cash value – an investment-like, tax-deferred savings account – earns interest at a fixed rate.
How it works: Whole life insurance has a guaranteed death benefit and cash value that earns interest over time. A portion of your premium goes toward the cost of maintaining the insurance policy and the rest goes toward the cash value account.
Pro: Cash value & lifelong coverage – the cash value component can cover endowments or estate plans. And since this coverage lasts for your entire life, it can help support long-term dependents such as children with disabilities.
Con: Cost & complexity – a whole life insurance policy can be significantly more expensive than a term life policy for the same death benefit amount. The cash value component makes whole life more complex than term life because of fees, taxes, interest, and other stipulations.
Best for: People who need to diversify their investment portfolio or those with dependents who may need long-term care.
Universal life insurance
Universal life insurance is a flexible permanent life insurance policy that lets you decrease – or increase – how much you pay toward premiums. If you decrease how much you spend on premiums, the difference is withdrawn from your policy’s cash value.
A universal life insurance policy can be a good fit if you’re looking for some flexibility in your life insurance – and you can afford that flexibility. A universal policy can be more expensive and complicated than a standard whole life policy, especially as you age and your premiums increase.
How it works: Universal life insurance allows you to adjust your premiums and death benefit depending on your needs. If, after some time, you decide to stop paying or lower your monthly premiums, you can use the cash value to cover your premiums.
Pro: Flexibility – you can adjust your premiums based on your financial needs.
Con: Investment risk – interest earned from the cash value is based on market performance, so it’s not the best option to save money for the future.
Best for: High earners who are trying to build a nest egg without entering a higher income bracket
Variable life insurance
Variable life insurance is a type of permanent coverage that allows you to invest the money from your cash value in various funds offered by the insurance company, including mutual funds.
While variable life insurance comes with a guaranteed minimum death benefit, the cash value amount is not guaranteed and will depend on market conditions.
You may earn more interest than you would with a whole life insurance policy, which gives you a fixed interest rate, but you, as the policyholder, will bear the investment risk if the fund underperforms.
How it works: Variable life provides the opportunity to invest the cash value in various funds offered by the insurance company, including mutual funds. Investment performance will reflect broader market trends.
Pro: Gains potential – variable policies may earn more interest than traditional whole life.
Con: Investment risk – potential for losing money if the funds you picked underperform
Best for: High earners looking for permanent coverage options to diversify their investment portfolio
The best way to decide on the policy that’s best for you is to talk with a financial advisor and work with an independent broker to find the right policy for your specific needs. At Policygenius, our experts are licensed in all 50 states and can walk you through the entire life insurance buying process while offering transparent, unbiased advice.
Final expense insurance
Final expense insurance, also known as burial insurance, is a type of life insurance designed to pay a small death benefit to your family to help cover end-of-life expenses.
Unlike traditional life insurance, which is meant to replace decades’ worth of income, burial insurance is usually suited to older adults who want a smaller policy to cover their funeral costs.
Because of its high rates and lower coverage amounts, final expense insurance is usually not as good a value as term life insurance.
How it works: Unlike most traditional policies that require a medical exam, you only need to answer a few questions to qualify for final expense insurance. And there’s little to no waiting period to get covered.
Pro: Guaranteed coverage – easy access to a small benefit to cover end-of-life expenses, including medical bills, burial or cremation services, and caskets or urns
Con: Cost – expensive premiums for lower coverage amounts
Best for: People who have trouble qualifying for traditional coverage, like seniors and people with serious health conditions
