What are the different types of life insurance?
The two main types of life insurance are:
- Term insurance, which covers you for a specified period of time and is more affordable.
- Permanent insurance, which covers you for as long as pay the premiums and tends to be more expensive.
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 at a guaranteed rate. 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 -- by some estimates, five to 15 times more expensive. 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?
Buying a term insurance policy can save you a lot of money compared to buying a permanent life policy. By some estimates, buying term is anywhere from five to 15 times cheaper than buying a permanent policy.
Another way to save if you are healthy is to undergo the medical exam process. While some people find this a pain in the neck, taking the time to undergo an exam can pay off.
By some estimates, no-exam life insurance costs 10% to 20% more than purchasing a policy after undergoing an exam.
You can get rates down by choosing a shorter term or a smaller death benefit, but it’s better to shop around for a lower rate than to sacrifice the coverage you need.
Types of life insurance by underwriting
Different types of life insurance are subject to varying levels of underwriting. Typically, when you purchase a life insurance policy, you will be subject to a medical exam and an analysis of your health history.
Some insurers sell life insurance that does not require a medical exam:
- 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.
The notion of not having to submit to a medical exam might seem attractive to those purchasing life insurance. However, in many cases, you will pay more for this type of coverage.
Because you are not undergoing 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
What is the best type of life insurance? There is no single answer that applies to all people.
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," Thompson says. "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 tax-advantaged growth of your savings. They also may 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," he says. "It’s important to work with a financial professional to help determine what’s right for you,” Thompson says.
