Types of Life Insurance
Learn more about life insurance to find a policy that fits your life and your needs.
Young professionals, busy families, retirees, business owners — no matter where you are in life, thinking about your short- or long-term financial goals often comes with questions. For some, life insurance may be a simple answer.
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:
Young Professional
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.
Business Owner
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.
Pre-Retiree
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.
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
Universal Life
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.
Universal life allows policy owners more flexibility in several ways. You can pay more than your premium (beyond the current cost of insurance). This additional amount is added to a separate account and can grow as part of the cash value. You can also choose whether the death benefit stays level or increases by the available cash value of the policy, within policy limits.
Whole Life
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.
Universal Life
Universal life allows policy owners more flexibility in several ways. You can pay more than your premium (beyond the current cost of insurance). This additional amount is added to a separate account and can grow as part of the cash value. You can also choose whether the death benefit stays level or increases by the available cash value of the policy, within policy limits.
Different types of universal life insurance may build cash value in different ways.
Traditional Universal Life
Indexed 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 allows the policy owner to place some or all of the cash value in index accounts whose returns are tied to the performance of market indexes. This allows the possibility of higher growth, but when the market index goes down, the cash value may not grow.
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
Indexed universal life allows the policy owner to place some or all of the cash value in index accounts whose returns are tied to the performance of market indexes. This allows the possibility of higher growth, but when the market index goes down, the cash value may not grow.
What to consider about permanent life insurance if you are a:
Young Professional
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
Pre-Retiree
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
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.
Think about…
Your age and income
If married, your spouse’s age and income
The number and ages of your children
Your family’s cost of living
Other people you support financially
Final expenses
Legacy plans
Learn From Experience
Have more questions about life insurance? Read on for more information from our pros.
The first number customers usually want to look at is the amount of coverage. This is the biggest question for most customers. How much do I need?
Life insurance can be a tricky topic. It’s designed to provide financial support for those who depend on you, but permanent life insurance can also be used to access money for big purchases during your lifetime through policy loans.
Both term and permanent life insurance offer “riders” that could potentially provide payments while you’re alive.
Farmers® companies, employees, agents, and representatives do not provide legal or tax advice. In general, partial or full surrenders from a permanent life insurance policy in excess of the policy’s basis are taxable. Limited circumstances exist where death proceeds will be taxable. This material has been prepared for general informational purposes only, and is not intended to provide and should not be relied on for tax, legal or financial advice. Because each individual’s situation is different, specific advice should be tailored to your particular circumstances; you should always consult your own tax, legal and other advisors before engaging in any transaction. This material reflects our general understanding of current law as of the date hereof, but tax laws and IRS administrative positions may change. This material is not intended to and cannot be used to avoid any Internal Revenue Service penalties. We specifically disclaim any liability resulting from the use or application of information contained in this publication. Farmers New World Life Insurance Company is not affiliated with or endorsed by any government agency.
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.
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