Guide to Different Types of Life Insurance

Life insurance is a financial safety net that ensures your loved ones receive money if you pass away. It provides financial security to your family members or beneficiaries by covering expenses like debts, costs, and future goals.

Many different types of life insurance are available, each serving different needs and budgets.

This article will guide you through each type of life insurance, its costs, and how to choose the right policy for you.

Main types of life insurance

The two main types of life insurance are term and permanent. Term life insurance provides temporary coverage for a set period, typically 10, 20, or 30 years. It’s more affordable than permanent life insurance and is ideal for temporary needs, like paying off a mortgage or income replacement.

On the other hand, permanent life insurance offers lifelong coverage and is typically more expensive than term life insurance. It also often includes a cash value component that grows, and you can access it for loans or withdrawals. These two types of life insurance serve as the foundations for more specific policies.

Term life insurance and how it works

Term life insurance covers a specified period, often 10, 20, or 30 years. If you pass away during the term, the policy pays a death benefit to the beneficiaries. If the term expires and you’re still alive, no benefit is paid out, and the coverage ends unless you renew or convert it.

Term life insurance is typically more affordable than whole life insurance because the coverage period is shorter and the policy has no cash value component. Term life insurance is a good choice if you want temporary coverage for things like mortgage or loan debts, future education costs for your children, or income replacement for a spouse or family.

Permanent life insurance and how it works

Also known as whole life insurance, permanent life insurance lasts your whole lifetime. Unlike term life insurance, permanent life insurance includes a cash value aspect, allowing you to grow your money over time and access it for loans or withdrawals.

Permanent life insurance is typically more expensive than term life insurance because the coverage period is longer and it provides added benefit through the cash value component. Permanent life insurance is a good choice if you’re doing estate or retirement planning, as it allows for financial flexibility not found with term life insurance policies.

Types of term life insurance

Term life insurance comes in various types, each with a unique purpose and serving different needs. Term life insurance is typically more affordable than permanent life insurance but varies in term length, renewal options, coverage amounts, and other aspects.1

• Convertible: This type allows you to convert your term policy into a permanent one at the end of its term without accounting for newly developed medical conditions.

• Renewable: This type lasts one year, and you can renew it annually without providing evidence of insurability, but premiums rise each year.

• Decreasing: This type offers cheap, fixed premiums with a decreasing death benefit each year.

• Level: This type has a fixed monthly payment and death benefit throughout the policy term.

• Voluntary: This type is an option offered by employers and operates like standard term life insurance.

Types of permanent life insurance

Permanent life insurance provides lifelong coverage. It typically includes a cash value component, which grows in value over time. You can use it to cover loans or pay premiums.

Permanent life insurance comes in a variety of different plans, each offering unique coverages and structures. All of them are typically more expensive than term life insurance, as they offer protection for longer coverage periods.2

• Whole: This type provides guaranteed death benefits and cash value growth at a fixed rate.

• Guaranteed: This type offers coverage regardless of health status, making it a good option if you have serious health issues.

• Universal/adjustable: This type offers a lot of flexibility, allowing you to adjust premiums, death benefits, and cash value.

• Variable: This type offers you the ability to have more flexibility with the cash value, allowing you to invest the money in stocks, bonds, and mutual funds.

• Variable-universal: This type combines the benefits of both variable and universal policies into one.

Other types of life insurance

Not everyone wants a more traditional life insurance policy, and you may want a rider to expand your coverage. If you’re looking for other life insurance policies that serve more specific needs, including accidental death and dismemberment, group, credit, and joint life insurance, here are some options.

Costs of different types of life insurance

Various factors affect the cost of life insurance, regardless of the type you buy. Your age, gender, lifestyle, health, occupation, coverage amount, term length, and family’s medical history all affect how much you pay. Term policies are almost always more affordable, while whole life insurance policies are higher investments that offer more stability.

The table below shows how much your age, gender, and term length can affect your costs for a $500,000 policy.

How to choose the type of life insurance that’s best for you

When choosing the best life insurance for you, consider your family’s needs and budget, and make sure the policy aligns with your future goals. Here are some key factors to keep in mind when deciding on a policy:3

• Length of coverage: Think about how long you want your policy to last. This determines whether you need term or permanent life insurance. Consider financial goals and obligations, like future education for your children, your mortgage, or long-term estate planning.

• Budget constraints: Consider your budget and determine how much you can afford in monthly premiums. This helps to inform what types of policies you can buy.

• Investment objectives: Think about your financial goals for the future. If you want to grow your wealth, consider a policy with a cash value option.

• Family needs: Consider your family’s needs and how much money they would need to continue on without you. Think about your children’s future education, your mortgage, and any outstanding debts you might have.

Before buying any policy, it’s important to compare your options. Compare quotes and policies from at least three different companies to find the right company that aligns with your goals.

Different types of life insurance FAQs