Types of Life Insurance

Shawn Plummer

CEO, The Annuity Expert

There are different types of life insurance policies available, and it can be confusing to know which one is right for you. In this guide, we will discuss the four most common types of life insurance policies: term life insurance, whole life insurance, universal life insurance, and variable life insurance. We will explain what each policy covers and help you decide which one is right for you.

What are the different types of life insurance?

You may know about term and whole life insurance, but there are eight types of life insurance. We’ll tell you everything you need to know about the following types:

  • Term life insurance
  • Whole life insurance
  • Universal life insurance
  • Indexed universal life insurance
  • Variable life insurance
  • Variable universal life insurance
  • Final expense insurance
  • Group life insurance

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Term life insurance

Term life insurance lasts for a set number of years. If you die before the term is up, it pays a set amount of money to your designated beneficiary. Term life insurance is considered the simplest and most accessible type of life insurance policy.

You make payments when you buy insurance. Then, when you die, your beneficiaries will get the money. You can decide how to get the money: lump sum, monthly payments, or annuity. Most people choose to get it in a lump sum.

Term life insurance is cheaper than other types of life insurance.

Whole life insurance

Whole life insurance is different from term insurance because it does not expire. Instead, it has a death benefit and a cash value, an investment-like, tax-deferred savings account.

Each month, a portion of the premium you pay goes into the cash value saved. So the more you put in each month, the faster it will grow. The cash value can be used to buy anything, or you can use it for a loan.

Whole life insurance protects you for the length of time you pay your premiums.

You might want to buy whole life insurance if you need the cash value to cover things like endowments or estate plans or if you have long-term dependents such as children with disabilities.

Term life insurance vs whole life insurance

Term life insurance is the best option for most people. But like with any product, there are good and bad points to consider.

Term life insurance pros

  • A straightforward policy with no hidden fees, exclusions, or risks
  • You can cancel your insurance before it expires and not lose any value.
  • The cheapest option

Term life insurance cons

Whole life insurance pros

  • Doesn’t expire
  • The cash value component is a useful thing for people who want to plan their estate.
  • Works as a long-term savings account
  • Potential living benefits to pay for long-term care expenses
  • Premiums stay the same (straight life insurance)

Whole life insurance cons

  • More expensive than term insurance
  • People often buy less insurance than they need or cancel their insurance early because it’s expensive.
  • Slow to grow
  • Cash Surrender Value of the policy changes with time

Universal life insurance

Universal life insurance has a cash value. The premiums for this go to the cash value and the death benefit. So any changes you make to what you pay or how much death benefit there can happen without getting a new policy.

If you have money in the cash value, you can use that to pay your insurance premiums. That way, with interest, your cash will be used up, and the interest will pay the premium.

Universal life insurance cash value

However, the interest rate on a universal life insurance policy is influenced by current market interest rates. Therefore, if the interest rate paid to your policy were to fall below the minimum rate, your premium would have to rise to make up for it.

Indexed universal life insurance

The differences between indexed universal life insurance (IUL) and other forms of universal life insurance (UL) are primarily how the cash value fluctuates.

An index is a collection of investments such as stocks, equities, or bonds. The S&P 500 and the NASDAQ-100 are examples of indexes. Your insurance policy won’t put your money into the market; rather, it uses an index’s interest rate and performance to calculate your policy’s interest rate. Thus, the index is essentially a measuring stick to determine the interest you earn.

A minimum guaranteed interest rate is available for indexed universal life insurance policies (so you won’t lose money). Still, the interest rates aren’t fixed or changed like some other permanent insurance plans. IUL, on the other hand, usually has earnings limitations, which means you may miss out on the profits if the index outperforms the maximum allowed.

Under IUL policies, all of the same coverages are available as with universal life insurance plans. However, the way the cash value account grows is unique. While universal life’s cash value has a variable interest rate determined by the life insurance company, indexed universal life’s cash value is based on an index chosen by the insurer.

Variable life insurance

The money you contribute to a variable life insurance cash value is deposited into a series of mutual fund-like sub-accounts, with the potential for decent growth and the risk of losing money based on the market.

A variable insurance policy’s cash value is comparable to that of a stock. While this makes variable life insurance plans superior investments than whole life insurance plans in the sense that they offer the potential for greater, tax-deferred growth, you may only invest in the sub-accounts available through your policy.

Because you can lose money due to a stock market crash, the product is riskier.

Variable universal life insurance

You can change the premium and death benefit amount for a variable universal life insurance policy by investing in its cash value. It also shares many of the same risks as other types of insurance.

Final expense insurance

Final expense life insurance is a way to cover burial and funeral costs.

Final expense insurance is a type of policy that covers the cost of anything associated with your death. It can include medical care, a funeral, or cremation.

This insurance is for older people who do not have life insurance coverage. The insurance can cover up to $50,000.

However, final expense insurance policies have a high price. If you or your family can’t pay for the funeral through other means, that is the best option.

Simplified issue life insurance

With simplified issue life insurance, you do not need to go through a medical exam. Instead, you just need to fill out a health questionnaire about smoking habits and serious illnesses and conduct a phone interview with the underwriting team.

Simplified issue life insurance policies are often designed for applicants ages 60 to 85.

Guaranteed issue life insurance

Guaranteed issue life insurance is different from traditional life insurance. You don’t need a health exam, and you don’t have to answer any health questions, as long as you can still pay the premiums. If you can’t answer application questions due to advanced dementia or Alzheimer’s, then you won’t be eligible for guaranteed issue life insurance.

Many older people, or people with a terminal illness, have trouble getting life insurance coverage because it is expensive. Guaranteed issue life insurance offers them this coverage. But other types of policies are cheaper and may offer more coverage for you.

Group life insurance policies

Group life insurance is a type of life insurance that some employers offer. It is different than the kind you buy on your own.

Many people think that the life insurance their employer provides is enough, but it might not be. The life insurance your boss provides for you is a benefit. But if you want to make sure your family will be taken care of, this may not be enough.

Employer life insurance usually provides low coverage, only enough to be worth one to two years of your salary.

Related Reading: Group Universal Life Insurance

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Now that you know the different types of life insurance policies, it is time to decide which one is best for you. Request a quote today and our team will be happy to help you find the right policy for your needs. Thank you for reading!

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Frequently Asked Questions

What are the three main types of life insurance?

Whole life insurance, universal life insurance, and term life insurance are three main types of life insurance.

The two types of life insurance are?

Term life insurance and permanent life insurance are the two main types of life insurance.

Shawn Plummer

CEO, The Annuity Expert

I’m a licensed financial professional focusing on annuities and insurance for more than a decade. My former role was training financial advisors, including for a Fortune Global 500 insurance company. I’ve been featured in Time Magazine, Yahoo! Finance, MSN, SmartAsset, Entrepreneur, Bloomberg, The Simple Dollar, U.S. News and World Report, and Women’s Health Magazine.

The Annuity Expert is an online insurance agency servicing consumers across the United States. My goal is to help you take the guesswork out of retirement planning or find the best insurance coverage at the cheapest rates for you. 

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