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

What does life insurance provide group of answer choices? ›

The basic premise is simple: Life insurance gives you peace of mind while you're alive, and financial support for your loved ones when you're gone. It's something you should have if there are people in your life depending on you for everyday living expenses, college tuition, or retirement income.

What are the three main variables among the different types of life insurance policies? ›

Compare Different Types of Life Insurance

Life insurance types are often distinguished by how long the policy can last, whether it builds cash value, and whether the premiums or death benefit can be variable.

Which type of life insurance is the most basic _____? ›

Term Life Insurance

This simple type of life insurance is often the most affordable option for many people. A term policy works by choosing the length of time the policy is active and the death benefit amount. The length of the policy, or term, is the period of time the policy provides coverage.

What is a comprehensive life insurance policy? ›

What is Comprehensive Life Insurance? A comprehensive life insurance plan combines the benefits of term life insurance and critical ailment cover. The comprehensive plan offers a host of advantages such as accidental death benefit, a critical illness cover as well as hospitalisation benefits.

What is life insurance Quizlet? ›

Define Life Insurance. Insurance that pays out a sum of money either on the death of the insured person or after a set period. Define Term Life Insurance. Term life insurance is designed to provide financial protection for a specific period of time, such as 10 or 20 years.

What is the purpose of life insurance _____? ›

The purpose of life insurance is to provide financial protection to beneficiaries in the event of the policyholder's death. It serves as a means to replace the income or cover the expenses of the insured individual, ensuring that their loved ones are taken care of.

What are the three 3 main types of insurance? ›

Although there are many insurance policy types, some of the most common are life, health, homeowners, and auto. The right type of insurance for you will depend on your goals and financial situation. Consumer Financial Protection Bureau.

What are the two main types of life insurance? ›

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 is the most common type of insurance policy? ›

The most common types of insurance coverage include auto insurance, life insurance and homeowners insurance. Insurance coverage helps consumers recover financially from unexpected events, such as car accidents or the loss of an income-producing adult supporting a family.

Which is the most expensive type of life insurance _________________________? ›

Whole life is the more expensive option. Both your monthly premium and the death benefit are guaranteed, meaning they won't change over the life of the policy.

What is the most common type of permanent life insurance called? ›

Whole or ordinary life —This is the most common type of permanent insurance policy. It offers a death benefit along with a savings account. If you pick this type of life insurance policy, you are agreeing to pay a certain amount in premiums on a regular basis for a specific death benefit.

What is the purest form of life insurance? ›

What is term life insurance? A term life insurance policy is the simplest, purest form of life insurance. You pay a premium for a period of time—typically 10 to 30 years—and if you die during that time, a cash benefit is paid to your family (or anyone else whom you name as your beneficiary).

What is basic comprehensive insurance? ›

What is comprehensive coverage? Comprehensive coverage helps cover the cost of damages to your vehicle when you're involved in an accident that's not caused by a collision. Comprehensive coverage covers losses like theft, vandalism, hail, and hitting an animal.

Which type of life insurance is less expensive? ›

Term life insurance is the cheapest type of life insurance policy; the cost of whole life insurance can be significantly higher.

Is comprehensive insurance useful? ›

Comprehensive insurance pays for almost any non-collision-related damage or loss, including hail, fire, vandalism, fallen tree branches, theft and hitting an animal. Without it, you'll need to pay out of pocket. With it, repairs and replacements are covered, regardless of fault.

What does a life insurance policy provide? ›

Buying life insurance protects your spouse and children from the potentially devastating financial losses that could result if something happened to you. It provides financial security, helps to pay off debts, helps to pay living expenses, and helps to pay any medical or final expenses.

What does life cover provide? ›

What is life cover? Life cover (or life insurance) will pay your dependants a pre-specified lump sum in the event of your death. This benefit is there to ensure that your loved ones are looked after and provided for, even if you are no longer alive and there to support them financially.

What life insurance gives you? ›

Life cover is a term used to describe life insurance or death cover which can provide a cash lump sum in the event of your death, or if you become diagnosed with a critical illness.

What does life insurance deals with? ›

Life Insurance can be defined as a contract between an insurance policy holder and an insurance company, where the insurer promises to pay a sum of money in exchange for a premium, upon the death of an insured person or after a set period.

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