What are the different types of life insurance?
The two main types of life insurance are term life, which covers you for a specified period, and permanent life, which covers you for your entire lifetime.
Permanent life insurance also includes several sub-types, such as universal and variable coverage. A final expense policy is also a type of whole life.
Following is a breakdown of some of the different types of insurance and what they cover.
| Life insurance type | Typical coverage length | Builds cash value | Medical exam required | Typical death benefit amount |
|---|---|---|---|---|
| Term | 10 to 30 years | No | Usually yes, but not always | $100,000+ |
| Whole | Lasts as long as you pay premiums | Yes | Usually yes, but not always | $50,000+ |
| Universal | Lasts as long as you pay premiums | Yes | Yes | $50,000+ |
| Variable | Lasts as long as you pay premiums | Yes | Yes | $50,000+ |
| Final expense | Lasts as long as you pay premiums | Yes | No | Varies, but often a few thousand to $35,000 |
Term life insurance
Term life insurance gives you coverage for a specific period of time that you agree to when you purchase the policy. For example, you may need coverage for 10 years or 30 years.
As long as you pay your premiums, your beneficiary will receive the death benefit if you die before the end of the term.
The cost of a term life policy depends on many factors, including your age, medical history, gender and even whether you have dangerous hobbies.
The term length also impacts how much you pay for life insurance. The shorter the term, the less you will likely pay for the coverage. That is because the longer you have the policy, the more risk there is that the insurer will need to pay out a death benefit.
Finally, the size of the death benefit will impact the cost of the policy.
Permanent life insurance
Permanent life insurance also offers a death benefit to provide for the financial needs of loved ones in the event of your death.
However, unlike term insurance, it does not expire after a given period. Instead, coverage lasts for as long as you continue to pay the premiums on your policy.
In addition, when you buy a permanent life policy, part of your premium goes toward building cash value. This money grows tax-deferred. You can tap this cash value during your lifetime.
Permanent life insurance policies are available in a variety of types. They include:
- Whole life insurance. This is the type of policy people typically think about when they hear “permanent life insurance.” It combines a death benefit with a savings account that houses your “cash value.”
- Universal life insurance. This type of policy offers more flexibility, allowing you to increase your death benefit or use cash value to reduce your premiums.
- Indexed universal life insurance. Unlike other policies, this type of insurance does not come with a fixed interest rate attached to your cash value. That means that compared to a policy with a fixed rate, you have a chance for higher returns but could also end up with lower returns.
- Variable life insurance. This type of policy lets you invest your cash value in various sub-accounts.
Permanent life insurance policies tend to be much more expensive than term life insurance. Permanent life insurance is designed to last until you die. Unlike a term policy, it does not have a built-in expiration date. That makes it more likely that your insurer will have to pay out a death benefit at some point.
Other features associated with permanent life insurance – such as the cash value component and the ability to earn dividends from your insurer – also contribute to its higher cost.
What is the cheapest type of life insurance?
Term life insurance is the cheapest option, allowing you to buy more coverage at a lower rate. Regardless of the type of coverage, you will pay less if you choose full underwriting with a medical exam, as long as you are healthy. No medical exam life insurance is more expensive because the company is taking on the risk of unknown conditions that could affect your life expectancy.
A smaller death benefit and shorter term length will also reduce the cost of life insurance, but you should select the coverage amount and policy type that best suits your needs and compare rates from multiple companies to find one you can afford.
Medical exam requirements by life insurance type
Both term and whole life insurance may require a medical exam. Requirements depend on the carrier, the amount of coverage you are buying and the policy terms. Simplified issue and guaranteed issue life insurance do not require a medical exam, although you may still have to answer health questions.
- Simplified issue. This type of policy requires you to answer a few questions about your health, such as whether or not you smoke or have a history of heart disease. Your answers to these questions may determine whether you get a policy and at what cost.
- Guaranteed issue. No medical questions are asked as part of this application, and you typically are "guaranteed" to get coverage as long as you pay the premium. However, guaranteed issue life insurance may have a waiting period of a year or two before your coverage kicks in, or coverage may be limited during the initial years of the policy.
If you choose a policy that does not require an exam, you pose a greater risk to the insurance company, which usually will try to mitigate this risk by charging you higher premiums.
How to choose the right life insurance policy
To choose the right life insurance policy, consider your financial needs now and in the future, how long you will need the coverage for, and your current age and health status.
Term coverage typically makes the most sense for those who only need insurance for a time, such as when you are raising a family. The coverage is affordable, especially for a higher death benefit.
"Someone in their 20s who just reached a life milestone such as getting married, buying a house or having a child may have simpler life insurance needs based around death benefit protection," says Stafford Thompson Jr., corporate senior vice president and chief actuary at Globe Life. "In these instances, a term policy may be sufficient."
Permanent life insurance policies may make more sense if you are interested in another place to enjoy the tax-advantaged growth of your savings. They may also be attractive to those who want to maintain coverage over a lifetime.
“Someone in their mid-40s will also likely have protection needs, but they may want a life insurance policy that can also help them plan for their retirement needs,” Thompson says.
Get expert advice before you buy life insurance.
"There is no one-size-fits-all approach when it comes to life insurance planning," Thompson says. "It’s important to work with a financial professional to help determine what’s right for you.”
