What are the different types of life insurance?
If you’re looking into life insurance policies, you’ll probably run across different types of coverage that fall into two main categories: term life and permanent life (including whole life). Understanding the differences between these two types of life insurance can help you choose a policy that fits your life and your goals.
Term life insurance
- Policy lasts for a specific period of time (think: term), as long as premiums are paid.
- Premiums are level for the initial 10, 20 or 30 years, then increase annually until the policy expires.
- Premiums pay only for current coverage. There is no cash value to help with future cost of insurance.
- Coverage expires when the term ends or lapses if premiums are not paid.
- Death benefit payment only occurs if the insured dies during this specific period.
What to consider about term life insurance if you are a:
The initial premium of term life insurance can make larger amounts of coverage more affordable.
If you have financial needs shorter than that level premium period, you can afford a larger death benefit to help your beneficiaries pay a mortgage, student loans or other debts, a child’s tuition, or even for future retirement.
For needs expected to extend beyond the level premium period, term insurance may become more expensive than permanent as premiums increase with age.
Premiums for a term life insurance policy per thousand dollars of coverage are generally lower than premiums for a whole life policy on a per thousand dollars of coverage for the same time period. This can make term life more affordable for large needs with a definite timeline. For example, helping to secure a loan repayment if the borrower dies or to cover the cost to recruit and train a replacement for a key employee who passes away.
Some people layer or blend different types of life insurance to help prevent being under- or over-insured. Now may be the time to consider converting an existing term policy to a permanent life policy.
Term life insurance often isn’t available at ages beyond 75, so if you need term insurance in retirement, it may be best to consider it while it’s still available.
Permanent life insurance (including whole life and universal life insurance)
- Policy provides coverage for the insured’s lifetime, as long as premium payments are made.1
- Premiums can pay for current coverage and build potential cash value to help cover future insurance costs.
- Cash value can help keep the policy in force if you are unable to pay premiums for some length of time.
- While primarily providing a death benefit, the policy owner may be able to access available cash value for other expenses under certain conditions.2
- There are several types of permanent life insurance. Each type offers different features that can provide more flexibility or death benefit options.
Whole life is a conservative type of permanent life insurance. Premiums and death benefit are guaranteed3 to stay level, and cash value grows at a guaranteed rate, as long as premiums are paid.
Different types of universal life insurance may build cash value in different ways.
Traditional Universal Life
Traditional universal life uses the life insurance company’s investments to help build the cash value. The company guarantees a minimum rate of growth, but growth may be higher depending on the company’s investment returns and expectations.
Indexed Universal Life
What to consider about permanent life insurance if you are a:
Some policies offer a cash value component you can use for anything, such as a down payment on a house or for a house renovation.2
Permanent life insurance can be suitable for long-term business scenarios, such as helping to fund a buy-sell agreement so a business can repurchase the interest of an owner/partner who passes away. It can also be used as an employee benefit to help retain key employees.
A policy rider available on certain policies that allow you to accelerate the death benefit or use of a policy with a cash value component for policy distributions2 — often called living benefits — can provide funds while you’re still living.2
Even if you have disposable income to help your family financially, retirees can own a policy on their child, for the benefit of their grandchildren.
Your life, your life insurance
As you shop around for life insurance, these details — factors that may be considerations for you and your life situation — can help you decide on the type of policy you want.
Your age and income
The amount of future income your family could lose
If married, your spouse’s age and income
The length of time your spouse needs support
The number and ages of your children
Their anticipated educational expenses or any special needs
Your family’s cost of living
Your mortgage or other debts that would continue without you
Other people you support financially
Aging parents or disabled relatives
Unpaid medical care and funeral costs
Your charitable giving goals
Learn From Experience
Have more questions about life insurance? Read on for more information from our pros.
1 Lifetime coverage (or life of the policy) is guaranteed as long as all premiums are paid to keep the policy in force.
2 Cash values may be accessible through policy loans or partial surrenders. Policy loans that are not repaid and partial surrenders will reduce cash surrender value and death benefit. Policy loans are subject to interest charges. If your policy is a modified endowment contract, loans and surrenders may incur taxes and penalties.
3 The death benefit is guaranteed according to the terms of the contract and provided that premiums are paid.