What Are the Different Types of Life Insurance?

When it comes to life insurance, there is no one-size-fits-all policy; different policies will suit different needs. The two basic types of life insurance policies are term and permanent life insurance. Term life insurance expires after a set period, while permanent life insurance provides lifetime death benefits. Aside from these, there are also individual and group policies. Individual policies are life insurance policies you purchase independently, while group life insurance policies are available through your employer.

Insurance policies can have strict requirements, often including a medical exam. However, some life insurance policy types may not require a medical exam, like simplified and guaranteed issue whole life insurance. Other types of life insurance coverage also cater to specific circumstances, such as final expense, accidental death and dismemberment and joint life insurance.

There are two main types of life insurance products: term and permanent life insurance.

• Term life insurance offers protection for a designated timeframe.
• Permanent life insurance policies like whole life or universal life extend coverage for the insured's entire lifetime and have the potential to build up a cash value as time progresses.

Choosing the right life insurance policy depends on your personal circumstances and financial goals. Before deciding, it's important to understand how life insurance works, including key policy terms and types of premiums.

Life insurance establishes an agreement between a person and an insurer. The person, known as the policy owner, makes consistent premium payments. In return, the insurer commits to delivering a death benefit to the designated beneficiaries upon the policy owner's passing.

The fundamental objective of life insurance is to offer financial security to the insured individual's dependents following their death. It can be part of a comprehensive financial plan, offering coverage that helps beneficiaries cover their bills and other living expenses.

Understanding the ins and outs of a policy will help you decide which suits your situation best. While the exact parameters will depend on the type of policy you get, all policies share a few common features, including:

These are the minimum components of a policy — no policy should be without these.

Depending on your needs and preferences, you may also choose to purchase additional coverage in the form of riders. Insurance riders are add-on provisions to a basic policy that provide additional benefits at an extra cost. Common riders include guaranteed insurability for additional coverage, accelerated death benefit for terminal illness and waiver of premium for disability.

Life insurance premiums are the payments the policyholder makes to maintain their life insurance coverage. These premiums can vary based on several factors, including the type of life insurance coverage, the policyholder's age, health and lifestyle. Understanding the different types of life insurance premium structures is helpful when selecting the best policy for your needs.

• Level Premiums: With level premiums, you pay the same amount throughout the policy term. This structure is common in term life insurance types and some whole life insurance policies. Level premiums offer predictability and make budgeting easier since you know exactly how much you will pay each period.

• Flexible Premiums: Policies like universal life insurance offer flexible premiums. This means you can adjust the amount and frequency of your payments within certain limits. This flexibility can be beneficial if your financial situation changes over time, allowing you to increase or decrease your premium payments accordingly.

• Single Premiums: Single premium life insurance requires a one-time, lump-sum payment. This type of premium is often associated with whole life insurance policies and can be advantageous if you have a significant amount of money available upfront. A single premium policy can provide immediate, fully paid-up coverage without the need for ongoing payments.

• Modified Premiums: Modified premium policies start with lower premiums for an initial period, typically 5 to 10 years, and then increase. This structure might be suitable for younger policyholders who anticipate higher income in the future. However, planning for the higher premiums later in the policy term is essential.

• Renewable Premiums: Some types of term life insurance offer renewable premiums, meaning the policy can be renewed after the initial term without a medical exam. However, the premiums will increase with each renewal due to the policyholder's age.

Choosing the right type of life insurance premium depends on your financial situation and long-term goals. Consider how much you can afford to pay now and in the future and whether you prefer consistent payments or flexibility.

Among life insurance policy types, term life insurance is one of the most popular. Term life is a type of policy that is limited by the length of coverage. A term is a period in which the policy is active, and it will expire on a specified date. There are three types of term life insurance: level term, decreasing term and renewable term.

A level term policy features premiums and death benefits that remain the same throughout the policy's life. This means that the amount you pay and the amount your beneficiaries will receive upon your death will not change during the term of the policy. This type of term life insurance provides a consistent, predictable benefit, making it a popular choice for many individuals.

A yearly renewable term policy allows a policyholder to renew their coverage each year without having to requalify or undergo a medical exam. The premiums for this type of policy can increase each year as the policyholder ages, but the death benefit remains the same. This type of term life insurance can be a good choice for those who want the flexibility to adjust their coverage annually.

A decreasing term policy’s benefits decrease over time. This means that while the premiums may stay the same, the death benefit reduces each year until it reaches zero at the end of the term. This type of term life insurance is often used to cover a debt that decreases over time. Two common types of decreasing term policies are mortgage life and credit life insurance:

• Mortgage Life: This type of decreasing term life insurance is designed to cover your mortgage debt. If you pass away before your mortgage is paid off, the policy can pay the outstanding balance directly to the lender. The mortgage lender will be the beneficiary of your policy, which means your loved ones may not receive a death benefit if you die during the policy’s term. The policy's death benefit decreases over time, aligning with the decreasing balance of your mortgage, but premiums remain the same throughout the term.

• Credit Life: Credit life insurance is another form of decreasing term life insurance that pays off your outstanding loans or credit card debts in the event of your death. The policy's death benefit decreases as you pay off your debts, and the policy expires once the debts are fully paid. This type of insurance is often offered when you take out a loan or a line of credit. It provides peace of mind that your debts will be covered should something happen to you.

MoneyGeek answered some of the most commonly asked questions about term life insurance.

For more information on term life insurance, check out these pages and more on MoneyGeek:

The average cost of term life insurance can change based on your age when you apply. Review the premium table below to see the average monthly rates by age and term for a $250,000 policy. Note that this may not be accurate if you have pre-existing conditions or smoke, as those who pose a higher risk may have more expensive policies. Your gender may also affect the cost of your premium.

Whole life insurance is a form of permanent life insurance typically used to pay for funeral costs, end-of-life expenses and debts. This type of coverage, also known as ordinary life or continuous premium life insurance, guarantees a set death benefit and premium amount and can build cash value over time. In other words, the premium is fixed for the life of the policy as you age.

A whole life insurance policy also comes with more investment benefits, as part of the policy will be invested in funds of your choice. This means more potential for monetary gains and losses over time.

There are different types of whole life insurance, including indexed whole, modified whole, participating and non-participating plans. Each type has unique features and benefits, allowing policyholders to choose the one that best fits their financial goals and needs.

Indexed whole life insurance is a type of whole life insurance that offers the standard benefits of whole life coverage with an investment twist: its cash value is tied to a market index, like the S&P 500. This setup allows the policy's cash value to potentially grow faster than a traditional whole life policy’s fixed interest rate. Yet, it avoids direct market investment, safeguarding your capital against market downturns.

This type of life insurance coverage features a fixed premium and a death benefit, providing the familiar security of whole life insurance while introducing the possibility for increased cash value growth based on the performance of the chosen index. The policy includes a guaranteed minimum interest rate, which means that even if the market performs poorly, your policy’s cash value won’t decrease, making it a safer investment option compared to other market-linked plans.

Modified whole life insurance offers an alternative premium structure designed to make coverage more accessible in the initial years of the policy. This policy features lower premiums at the start, which then increase after a predetermined period, typically after the first five to ten years.

This approach allows policyholders to secure a whole life insurance policy at a lower upfront cost, making it especially appealing for individuals who may anticipate higher income in the future but want the comprehensive coverage and cash value benefits of whole life insurance now. As with other types of whole life insurance, this policy provides a guaranteed death benefit and has the potential to accumulate cash value over time, which can be borrowed against if needed.

Whole life insurance policies can also be classified as either participating or non-participating.

Participating whole life insurance policies are those where the policyholder may receive dividends from the insurer's profits. These dividends are not guaranteed but can be used to reduce premiums, accumulate in an interest-bearing account, or purchase additional insurance. Participating policies tend to be more expensive but offer the potential for added value through dividends, enhancing the policy’s cash value or increasing the death benefit over time.

On the other hand, non-participating whole life insurance policies do not pay dividends. The benefits, premiums and death benefits are fixed and do not change based on the insurer's financial performance. This type of policy offers stability and predictability with typically lower premiums than participating policies. Non-participating policies are straightforward, with no fluctuations in costs or benefits, making them easier to manage for those who prefer consistency.

MoneyGeek answered some of the most commonly asked questions about whole life insurance below.

Universal life (UL) insurance, otherwise known as adjustable life insurance, is a policy that lets owners customize their premium payments, cash fund value and death benefits. With this type of insurance, you have total control of your policy. Your insurer will invest your money in the stock market, so think of a UL policy as a mutual fund with free insurance. There are two types of universal life insurance policies: indexed (IUL) and variable (VUL).

It’s worth noting that UL is best for individuals with money they’d like to invest and are investment savvy. The policyholder is responsible for choosing their plan’s components — including where the provider invests the funds. Remember that while a UL policy allows you to grow tax-deferred cash funds in a self-sustaining policy, you could also lose everything in a market crash.

UL might seem like an excellent all-around investment-protection plan, but like any investment, it has risks and may not be for everyone. Only consider IUL and VUL plans if you have a:

• Lengthy Investment Horizon: Between the gradual market growth and steep management fees, you’ll need to let your money sit for at least a few decades. Otherwise, you won’t maximize the potential of your UL policy.
• High-Risk Investment Appetite: IUL and VUL policies invest in market indexes and individual assets, respectively. Note that both options carry some degree of risk. Consider other insurance options if you are uncomfortable with the associated risk.
• Whole Life Insurance Policy: Unfortunately, your beneficiaries won’t receive their full death benefit if your UL funds aren't performing well. You’d do well to have another insurance policy in place.

Indexed universal life insurance (IUL) provides lifetime protection for fixed-term payments. An IUL invests your money in market indexes, not individual stocks and bonds, which means capital growth will be slower. However, since you have a diversified portfolio, your fund manager can use appreciating assets to cover more losses.

An IUL is a perfect option for conservative investors. It is a relatively safe gateway to the stock market without compromising security and insurance. Of course, every investment has risks. However, you and your fund manager can prevent total losses by setting reasonable principal depreciation limits. Note that this may not be available in all states.

MoneyGeek answered some of the most commonly asked questions about universal life insurance policies.

Variable universal life insurance (VUL) is a type of UL that invests your premiums into individual assets. You can buy any stock, bond or security of your choice. Depending on the performance of your assets, your funds might grow larger in a VUL policy in the long run.

However, despite being the most flexible, VULs also come with a higher risk. Unlike IUL, you can’t set index caps and floors, so you’ll have to hedge your funds through asset division and market timing. But don’t worry if you’re still learning stock market investing: if you commit to minimum payments, your policy should always have enough funds for coverage and investments.

MoneyGeek answered some of the most commonly asked questions about variable life insurance below.

In most life insurance policies, there is a strict underwriting process that evaluates your level of risk, which often includes undergoing a medical exam. Below are a few key points to understand:

• The underwriting process accounts for your lifestyle, hobbies, medical history, occupation, gender, age, mental health and more.
• Even if you aren’t in perfect health, providing the insurer with detailed, honest health information will lead to lower premiums. The more comprehensive the information provided, the cheaper your premium will likely be.
• Insurers will charge a higher premium to people with poor health or unhealthy lifestyles.
• Some insurers determine coverage options based on accelerated options that use algorithms and less comprehensive medical questionnaires. Although this option is more streamlined, it often requires good health and may not suit the elderly.
• Some companies can deny your application if you do not meet their standards.

Fortunately, there are types of life insurance products for those unsure they may pass the underwriting process. Below are some types of life insurance plans that are not underwritten and don’t require a medical exam.

Group life insurance covers a specific group of people who will receive the same benefits. Employers typically offer these policies to employees. Depending on your company’s contract, you might have to shoulder a portion of the payments for this coverage. Fortunately, premiums will cost less than a typical whole life insurance policy.

Group life insurance plans yield several benefits but also have limitations. You’ll receive the same coverage as everyone else within the group, which means it may not align with your and your family’s specific needs. Only your employer can customize your policy.

Note that company group policies still undergo underwriting procedures. Regardless of your employer or your status, you may not qualify for insurance if you:

• Have a terminal illness
• Partake in dangerous hobbies
• Perform a high-risk, hazardous job
• Provide incorrect medical and health information

Since a group life insurance policy is obtained during employment, you can expect the policy or coverage to end once you leave the company.

If you want an easy-to-get policy without frills, you may want to consider a simplified or guaranteed issue whole life insurance policy. These two individual policies don’t require medical exams. Instead, your insurer will ask you a few health and medical questions, which shouldn’t take more than a few minutes to finish.

However, insurers will still do basic underwriting. Although they won’t ask you to undergo medical exams, they’ll confirm your condition with their third-party sources. As a general rule, you won’t qualify for either form of coverage if you’re terminally ill.

Before applying, note that simplified and guaranteed issue whole life insurance policies have several key differences. The latter generally has higher premiums. Additionally, guaranteed acceptance insurance usually caps coverage at $25,000; only a handful of insurers consider $50,000.

Alternatively, simplified life insurance has a slightly more rigid underwriting process but has lower premiums and higher coverage limits. A healthy adult might qualify for $100,000 to $250,000 of coverage.

Simplified and guaranteed life insurance policies are not for everyone. Their premiums cost more, and coverages cap at $25,000 and $250,000, respectively.

However, you might benefit from these policies if you:

• Can’t qualify for other life insurance policies
• Need fast coverage for urgent final expenses
• Are older and don't have life insurance coverage
• Don’t mind paying extra for insurance

Consider how your unique circumstances and financial goals apply before making a decision.

Beyond traditional life insurance policies, there are other types of coverage that may not be as commonly known but can provide specific coverage tailored to certain situations.

Final expense life insurance covers the end-of-life costs your living beneficiaries will need to cover, such as medical, funeral and burial expenses. Beyond this, final expense insurance doesn’t cover much. However, it’s an affordable insurance policy you can get at almost any stage of your life. Unlike whole life insurance, insurers tend not to reject older adults.

While the low premiums may seem attractive, note that this is due to low coverage. Term life and whole life insurance policies may still cover final life expenses. This type of policy benefits those whose beneficiaries are financially established and need minimal financial support.

Accidental death and dismemberment (AD&D) insurance provides coverage in the event of a serious accident. This policy pays out if the policyholder dies or loses sight, speech, hearing or functioning of a limb due to an accident. It's often offered as a rider to a standard life insurance policy or as a standalone policy.

Joint life insurance is a policy that covers two people, typically for spouses seeking life insurance, and pays out on the occurrence of either the first or the last death. There are two types:

• First-to-Die: This policy pays out upon the death of the first policyholder. It's often used to provide financial support for dependents or to cover a mortgage or other large debt.
• Last-to-Die: This policy pays out upon the death of the last surviving policyholder. It's often used for estate planning purposes, such as covering estate taxes.

Given the variety of life insurance choices, it can be challenging to determine which is best for you and your loved ones. Review some of the most frequently asked questions below to understand your options.