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In a nutshell
The two main types of life insurance you can buy are term and permanent life insurance.
- Term coverage lasts for a certain number of years (its term), usually from ten to 30 years.
- Permanent coverage lasts your lifetime.
Before deciding which type of life insurance is best for you, it may help to understand the different types of life insurance and how they could benefit your and your family’s financial future.
Term life insurance
When you buy term life insurance, it is usually sold in year lengths. You can get an annually renewable term life policy or one that lasts for one, five, 10, 15, 20, 25, or 30 years with some carriers. The amount of coverage you can buy varies by company but typically begins at a $100,000 death benefit, going up to several million dollars in coverage.
Though term life insurance is usually the cheapest type of life insurance, it only lasts for a certain length of time. You pay premiums for the length of the policy term, and if you die while the policy is active, your beneficiary receives the death benefit payout. If you live beyond the term, then your beneficiary receives nothing.
Though level term is the most popular type of term life insurance, decreasing term is another option. Decreasing term life insurance is usually sold as mortgage or credit insurance. When you buy a decreasing term, your premiums typically stay the same, but the coverage amount decreases to align with your decreasing loan amount.
Best for: Those needing a large amount of coverage on a budget.
Permanent life insurance
1. Whole life insurance
The most popular type of permanent life insurance is whole life insurance. It’s designed to last your entire life, with payments typically due until age 100, though some carriers offer different payment options, like a 10- or 20-year payment plan. After the payment plan is complete, the policy is “paid up” and will be in force until death.
When you buy whole life insurance, you get a death benefit, premiums that won’t change, and a cash value account with a guaranteed interest rate. Part of your premium goes towards the cash value, which will grow over time and can be used while you’re still alive.
There are three major types of whole life or permanent life insurance — traditional whole life, universal life, and variable universal life, and there are variations within each type.
Best for: Those with lifelong insurance needs wanting a built-in savings account.
2. Universal life insurance
There are several types of universal life insurance, also called adjustable life insurance, to choose from. While universal life is a form of whole life because it has a cash value component, universal life offers much more flexibility. With universal life, you can increase or decrease your death benefit or premiums as long as certain criteria are met, like having enough money in your cash value account to make up for decreased premiums.
Best for: Those who want lifelong insurance with built-in flexibility.
3. Indexed universal life insurance
One of the more popular types of universal life insurance is indexed universal life (IUL). This policy offers accelerated growth potential because the cash value interest rate is tied to the stock market index, such as the S&P 500. There is a maximum interest rate you can earn on the cash value, and the stock market index is determined by the insurance company. Depending on the policy, you may get a minimum guaranteed interest rate on the cash value.
Best for: People who max out their investments but aren’t risky investors.
4. Guaranteed universal life insurance
If you want the flexibility of universal life but don’t want the market risk, guaranteed universal life (GUL) insurance may be a better fit. This policy is a mixture of whole and universal life. It offers the death benefit flexibility of universal life but the guaranteed premium of a whole-life policy. It also includes a “no-lapse” guarantee feature, which guarantees your policy will not lapse as long as you keep making payments.
These policies typically build up very little cash value. No-lapse guaranteed universal life can be a cheaper alternative to whole life insurance because the premium goes almost completely to the death benefit instead of growing the cash value.
Best for: People with lifelong insurance needs looking for no-frills coverage on a budget.
5. Variable life insurance
A variable life policy includes a death benefit and a cash value account with investments in bonds, mutual funds, or stocks. Both the cash value and death benefit can go up or down based on market fluctuations, and some carriers offer a minimum guaranteed death benefit. While this policy can offer enormous growth potential, there is a high risk of the policy lapsing, so you can’t “set it and forget it” like some of the permanent life insurance options.
Best for: The hands-on investor willing to risk their death benefit.
6. Variable universal life insurance
A variable universal life (VUL) policy offers the risk of the market with the flexibility to change the death benefit and premiums. Policyholders can choose their cash value market participations based on their risk tolerance. With VUL, you have to manage your own investments, so it’s best for an experienced investor.
Best for: A savvy investor knowledgeable enough to manage their own investment portfolio.
Other types of life insurance
Outside the major categories of life insurance, you can also get coverage for more specialized needs.
1. Accidental death and dismemberment insurance
Also called AD&D insurance, accidental death and dismemberment insurance pays if you die an accidental death or lose at least one limb, your eyesight, or hearing in an accident. This type of insurance can be bought individually or as a supplemental rider on your life insurance policy.
2. Credit life insurance
This type of life insurance is usually offered by the lender when you take a credit loan, such as a home equity or car loan. If you die before you pay the loan in full, the lender gets the death benefit to satisfy the loan.
3. Final expense insurance
Final expense insurance is a type of whole life insurance made for seniors 50 and older, though some carriers offer it to younger adults. It’s often called funeral insurance or burial insurance because it pays for final expenses, like your funeral and end-of-life costs. Some policies pay out at age 100, while others are payable upon death. Final expense typically has smaller death benefit coverage amounts than other types of whole life insurance.
Seniors usually don’t have to take a medical exam for final expense insurance. There are two types of final expense life insurance: simplified issue and guaranteed issue. Health questions are part of the application for a simplified issue final expense insurance policy, so it is best for seniors with few health issues.
Guaranteed issue final expense is best for those with serious health issues and doesn’t have any health questions on the application. These plans usually cost more than simplified issue policies because health is not a factor, and everyone is rated at the highest risk.
Best for: Seniors needing life insurance to cover their final expenses.
4. Group life insurance
Group life insurance is the same as employee life insurance, which covers all employees of the same company under one contract. Though the employer typically owns the policy, the employee is covered and can choose their own beneficiary. Group life insurance is a voluntary working benefit, meaning you don’t have to purchase it. The employer may pay the employee’s cost, and there could be coverage for the employee’s spouse and dependents, paid at the employee’s cost.
There is usually a cap on the amount of coverage you can get based on a multiple of your annual salary. Group life insurance is like term life without a cash value account, but rates are usually cheaper compared to individual life insurance. Rates are pre-determined and based on group characteristics within the company. Most group life insurance policies are not portable, which means you can’t take them with you if you leave the company.
Best for: Those wanting a supplement to their existing life insurance.
5. Joint life insurance
Joint life covers two lives, typically spouses. First-to-die joint life insurance pays when the first insured dies and then expires without coverage for the second insured. Second-to-die joint life insurance pays after the second insured dies.
6. Mortgage life insurance
This type of insurance covers the mortgage balance until it’s paid in full. Like credit life insurance, the lender is the policy beneficiary, not someone chosen by the policyholder.
The AP Buyline roundup: Which life insurance is best for you?
Which type of life insurance is best for you depends on your needs. If you have temporary needs, like paying off a mortgage, student loans or other debts, term life insurance may be the best option. But if you have permanent life insurance needs, like paying for end-of-life care and funeral expenses, whole or universal life may be best.
Consider if you need cash value growth and your level of stock market risk when choosing which permanent life policy is the best for you. If you don’t want the lender to get the death benefit, you may consider including those debts in an individual-term life policy. If portability is a concern, group life insurance may not be the best option, though its low price could be a supplement to your other life insurance coverage.
You may also find you need to buy more than one life insurance policy. Getting a larger term policy with lower premiums pays for temporary needs that will be paid off by the time the term expires, and a permanent policy you’ll keep until you pass away that pays for final expenses.
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