What are the different types of life insurance?
Beyond the general difference between term and permanent, understanding the nuances of these five key life insurance types can help you determine which is right for you. Jump to a section to learn more about each type of life insurance:
- Term life insurance
- Whole life insurance (permanent)
- Universal life insurance (permanent)
- Variable life insurance (permanent)
- Final expense life insurance (permanent)
Term life insurance
Term life insurance is generally more affordable than permanent life insurance. It provides coverage for a set number of years, paying out as long as your policy hasn't expired and you've paid the premiums. You can lock in your rate for the entire term period, which makes budgeting and planning easier.
At the end of the term period, and based on the product options available, you may be able to renew your policy at an adjusted rate. However, you can typically only renew a term life policy on a year-to-year basis — not for another term period. Your new rate will be based on your age and health at the time of renewal, and you may or may not need a medical exam to obtain coverage. You may also be able to convert your term life policy to whole life at the end of your term.
Types of permanent life insurance
The coverage from permanent life policies lasts your entire lifetime, and there are four key types:
Whole life insurance
As a type of permanent life insurance, whole life insurance provides coverage for your entire lifetime, paying your benefit no matter when you pass away — as long as you keep paying your bill. Whole life insurance also includes a savings component that a portion of your premium will pay into. The savings component has a fixed interest rate that builds cash value over time, which is part of the reason whole life policies typically cost more than term life policies with similar coverage.
The cash value of your policy won't affect the death benefit paid out upon your passing. However, if it grows to equal your death benefit amount by the time you're a set age (usually 100 or 120), your insurer will terminate your policy and pay out the coverage amount.
If you're not banking on living to 100, you can choose to withdraw a portion of cash value funds as a life insurance loan. There's typically no credit check required and a minimal loan approval process. You can pay back the loan with interest, or if you pass away before returning the funds, the remaining loan amount and interest will be withdrawn from the payout to your beneficiaries.
Universal life insurance
Universal life insurance is another permanent life insurance option, so it provides coverage for your entire life as long as the premiums are paid. It's sometimes called adjustable life insurance because it offers more flexibility than a whole life policy. For example, universal life policies allow you to increase or decrease your death benefit and even adjust or skip your monthly premium (within certain limits).
As with whole life, a universal life policy has a savings component that grows and allows for borrowing. However, a universal life policy works differently than a whole life policy in two key ways:
- The interest rate for a universal life policy's cash value is not fixed. You'll have a guaranteed minimum interest rate, but in general, the rate at which your cash value builds can change over time based on market conditions.
- Your universal life policy's cash value can eventually grow and result in a zero-cost policy, in which all premiums are paid from the built-up value.
Variable life insurance†
Variable life insurance is a riskier type of permanent life insurance. A common variable life insurance policy design is built on two pieces:
A face value death benefit
Just as with whole life and universal life, when you purchase a variable life policy, you'll select a fixed death benefit to be paid out upon your passing as long as you pay your premiums.
A variable cash value
Your cash value will rise and fall based on the payments you make and the performance of investments you select. Unlike with whole life, your variable life cash value can be part of your death benefit.
The greater range of investment options offered by a variable life policy means it could, in the long run, provide a greater benefit to your beneficiaries when you pass away — especially if you're a savvy investor. But it also opens you up to much higher risk, fees, and costs than whole life or universal life policies.
Final expense life insurance
Also known as funeral or burial insurance, final expense insurance is a type of whole life insurance that offers a smaller and more affordable death benefit designed to help cover your end-of-life expenses like funeral costs, medical bills, or outstanding debt. While other types of life insurance may have age and health requirements, final expense policies can be easier for older or less-healthy individuals to qualify for. A final expense policy's cash value would operate the same as a whole life policy's.
Comparing the different types of life insurance
Compare the five key types of life insurance policies using this chart.
|Life insurance type||Coverage length||Best for ages||Builds cash value?||Medical exam required?||Death benefit amount|
|Term||Coverage length 10, 15, 20, 30 years||Best for ages 18 – 65||Builds cash value? No||Medical exam required? Varies||Death benefit amount $100,000+|
|Whole||Coverage length Your lifetime||Best for ages 18 – 65||Builds cash value? Yes||Medical exam required? Yes*||Death benefit amount $50,000+|
|Universal||Coverage length Your lifetime||Best for ages 18 – 65||Builds cash value? Yes||Medical exam required? Yes||Death benefit amount $50,000+|
|Variable†||Coverage length Your lifetime||Best for ages 18 – 65||Builds cash value? Yes||Medical exam required? Yes||Death benefit amount $50,000+|
|Final Expense||Coverage length Your lifetime||Best for ages 50 – 85||Builds cash value? Yes||Medical exam required? No||Death benefit amount $2,500 – $35,000|
Other types of life insurance
There are non-traditional life insurance types called simplified issue and guaranteed issue that don't require a medical exam. These can typically be whole life or term life policies that have a simplified underwriting process. While simplified issue policies may involve a health-related questionnaire, guaranteed issue policies won't factor in your health at all. Your coverage options may be lower and more expensive than with traditional policies, but they can be obtained faster. Final expense policies are often simplified or guaranteed issue.
Instant life insurance is similar to simplified issue but may have higher and more affordable coverage options (such as this new one-year, short-term life insurance policy).
There are also different types of life insurance riders you can add to a policy to change how your life insurance works under certain circumstances.