Types of Life Insurance

When you’re ready to buy coverage, understanding how does life insurance work is crucial in picking the right plan. With so many types of life insurance coverage on the market, comparing policies side-by-side can help you decide which one fits best.

Each type of life insurance has benefits and disadvantages. For example, term life insurance works for people who need affordable, short-term coverage to pay off loans or mortgages. Permanent plans cost more than term, but you never have to worry about renewing your policy.

Learn more about your coverage options below, including which types of life insurance are best for different lifestyles and budgets. Then, compare rates with as many companies as possible to find the best plan for you.

How Different Types of Life Insurance Work

Life insurance is a legal contract between you and your insurance company. You agree to pay monthly or annual rates in return for death benefits that will pay out when you pass. Your life insurance beneficiaries will use death benefits to cover funeral costs, mortgages and other debts, college funds, and more.

Death benefits will vary based on the kind of policy you have. However, the policies you can buy will depend on the type of life insurance you qualify for. For instance, companies often require medical exams before underwriting coverage, and your options might be limited by your medical history.

The Three Main Types of Life Insurance Policies

The three main types of life insurance policies are:

• Fully underwritten life insurance: Requires a medical exam, and the application will ask questions about your and your family’s health history, career and lifestyle, hobbies, travel plans, and more.
• Simplified issue life insurance: Simplified issue life insurance doesn’t require a medical exam, but you still have to answer lifestyle questions about your health history to qualify for coverage.
• Guaranteed issue life insurance: Guaranteed issue life insurance skips the medical interview and exam, but rates are higher than simplified or fully underwritten policies.

If you have a hard time qualifying for life insurance, guaranteed issue might be your only option. Final expense insurance is the most common example of no-medical-exam life insurance. It comes with minimal coverage that only pays for funeral and burial expenses, usually $35,000.

Simplified life insurance is available as a term or permanent policy, but it may be difficult to find. Since it offers higher death benefits without a medical exam, often up to $100,000, many companies are not willing to underwrite the risk.

Fully underwritten policies have the highest limits, best coverage add-ons, and different investment opportunities for permanent policies. You must take a medical exam and answer health questions to qualify for coverage.

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Different Types of Life Insurance Explained

Deciding what life insurance type is best depends on the coverage you qualify for. For example, if you qualify for fully underwritten or simplified life insurance, you will have more policy options available to you.

There are five common types of life insurance policies. Term life is the most popular and affordable policy, but you might want a different type of life insurance for lifetime coverage or cash value.
What life insurance is best? Compare life insurance policies in this table:

Different Types of Life Insurance Explained

We break down these types of coverage and compare whole life vs. term life in more detail in the sections below.

Term Life Insurance

Term life insurance is the most popular policy because it is the most affordable. Term life insurance quotes start at $26 per month.

Rates are low because term coverage only lasts for a certain number of years. In most cases, policyholders use term life insurance to cover major investments, like mortgages or college funds, should they die unexpectedly.

Most term policies are between 20 and 30 years, although some companies will offer up to 40 years or as short as one or five-year terms.

Unlike permanent life insurance policies, your family will not receive any death benefits if you outlive the term. You must have convertible or renewable term life insurance to maintain coverage after the initial term ends.

Learn more about these different types of term life insurance policies:

• Guaranteed Level Term: The most common type of term life insurance. Coverage lasts for 10-40 years with set annual rates and guaranteed death benefits for the life of the policy.
• Convertible Term Life: You have the chance to convert the policy into whole life at the end of the term at increased rates. You may also have to take another medical exam.
• Decreasing Term Life: Policy death benefits decrease as you age, as do your term life insurance rates.
• Increasing Term Life: Death benefits increase annually by a certain percentage or set amount, which can help cover inflation as you age.
• Modified Term Life: Has cheaper rates at the beginning of the term, but rates will increase by the fifth year of the policy. Some companies sell modified whole life policies.
• Renewable Term Life: You have a chance to renew your policy at the end of the term. Often, you’re able to renew without a medical exam, but you might not be eligible for coverage after a certain age.

Be aware that policies will vary based on where you shop. You may also come across different names for types of life insurance. For instance, graded life insurance is another name for modified life.

If you’re looking for a particular type of term coverage, compare multiple companies to find one with the policy you need.

Whole Life Insurance

Before you buy renewable or convertible term life, we recommend comparing whole life insurance quotes to see which is more affordable for the long term.

Whole life insurance is a permanent policy where coverage lasts your entire life. Monthly rates will be more expensive than term life up front, but rates are fixed, and you will end up paying less than you would when converting a policy later in life. Further, you can use the cash value of your whole life policy to pay your monthly rates later in life.

Unlike term life insurance, only permanent policies accumulate cash value at a fixed interest rate. You can borrow against it, invest it, and use it to pay premiums. You can also surrender the policy before you die for the current cash value. While there are several types of life insurance with cash value accumulation, whole life is the easiest to understand.

However, when you die, your beneficiaries will only receive the death benefits and not any of the remaining cash-value amounts. If you buy whole life insurance, it’s in your best interest to use up the cash value as part of your investment or retirement strategy. Learn more in our whole life insurance guide.

Variable Life Insurance

Variable life insurance (VLI) is another type of permanent, fully underwritten policy. Coverage lasts your whole life and comes with a cash-value component. You can borrow against your life insurance’s cash value or invest it.

You have more investment opportunities with variable policies than with traditional whole life, and you can choose which market index to use, creating the potential for much larger returns. On average, VLI policies build cash value that often exceeds the death benefit amount, but that all depends on market performance.

For example, if the market performs poorly, you risk losing some or all of your cash value. However, VLI policies guarantee death benefits. As long as you continue to make your premium payments, you will never lose coverage based on market performance.

We recommend hiring a financial advisor before buying variable life insurance to better understand the risks.

Universal Life Insurance

Universal life insurance is a more flexible type of permanent policy when it comes to the cash-value component. Policyholders can choose which market to invest in and change their strategy at any time once they meet the cash-value threshold of the policy.

The cash value can be used to pay premiums and cover death benefits, but most types of universal life do not guarantee death benefits. You risk losing coverage if your investments don’t perform as planned.

Learn more about the three main types of universal life insurance:

• Guaranteed Universal Life: Coverage lasts your entire life, and death benefits are guaranteed, but the policy does not have a cash-value component.
• Indexed Universal Life: Coverage lasts your entire life, and the cash value is invested in a specific stock market index. You can borrow against the cash value or use it to cover premiums.
• Variable Universal Life (VUL): Some companies offer a hybrid variable-universal policy that guarantees death benefits while allowing for sub-account investments and adjustable premiums.

Guaranteed universal life is one of the more affordable types of permanent life insurance since it doesn’t earn much, if any, cash value. On the other hand, indexed life and VUL insurance have the option of adjusting premiums and death benefits, but life insurance rates are much more expensive.

It is important to note that many index and variable universal life insurance policies cap your rate of return, usually around 8% or 10%. This is still considerably more growth than a traditional policy, but you will likely pay an agent or advisor to regularly monitor your account.

Consider the costs and speak with an agent about life insurance for high-net-worth individuals to better understand how universal life insurance works for you.

Final Expense Life Insurance

Final expense, or burial insurance, is the most affordable policy for people who do not qualify for traditional life insurance. Poor health, risky hobbies or careers, and even your age can make you ineligible for coverage with some companies.
If you don’t qualify for fully underwritten or simplified coverage, you can buy final expense life insurance to pay for funeral and burial costs. This policy is not designed to cover debts, as benefits rarely exceed $50,000.

Group Life Insurance

Group life insurance can be any type of the policies discussed above. Employers will offer group life insurance policies as a perk so employees can enjoy discounted rates.

Typically, employers offer these three types of group life insurance plans:

• Group Term Life
• Group Whole Life
• Group Universal Life

It works the same as individual policies, providing coverage for the individual employee who opts into the group plan for their whole life or a set term.

Employees are able to save money on life insurance since rates are based on the risk class of the group rather than the individual. Coverage is usually minimal, but you can easily upgrade coverage or buy add-ons.

A big difference is death benefits are usually capped, although you can often increase limits for an additional fee. Another key difference is group life insurance is strictly available through your employer or employee union. You cannot bring group life insurance with you if you find another job.

You will lose coverage if you leave a job with a group life insurance policy. Some employers may transfer policies, but this is unlikely and typically reserved for people changing positions within the same company.

Optional Types of Life Insurance Riders

Term and whole life companies offer life insurance add-ons known as riders to supplement your coverage. Most riders provide death benefits early to protect policyholders who become unable to work due to disability or illness, even for a short time.

The most common life insurance riders are:

• Accelerated death benefits: Policyholders will receive a portion of the death benefit after the diagnosis of a terminal illness.
• Child term: Provides a death benefit if a child dies before a certain age. Parents can convert the rider into a policy for their child without a medical exam after they age out.
• Critical illness/disability: Policyholders will receive a portion of death benefits after becoming disabled or diagnosed with an illness specified in the policy.
• Guaranteed insurability: Policyholders can buy more life insurance without a medical exam.
• Long-term care (LTC): A type of accelerated death benefits rider that releases a portion of the benefit to pay for nursing home or assisted-living expenses.
• Return of premium: The insurance company will refund your annual rates if you outlive the length of your term life insurance policy.
• Term insurance: Added to permanent insurance policies to provide additional coverage for a short amount of time.
• Waiver of premiums: Policyholders aren’t required to pay monthly or annual life insurance rates if they are disabled, sick, or otherwise unable to work.

Options will vary by company and policy. Depending on your risk class, you may not be eligible for some life insurance riders. For example, most guaranteed issue policies, including final expense insurance, do not come with riders.

Shop around with different insurers to find out which riders are available to you.

Other Types of Life Insurance

Life insurance isn’t for everyone. If you’re unsure if you need life insurance, consider other policies that might work for your unique situation.

Perhaps you have a short-term loan or take care of an adult child or parent. Different types of life insurance can guarantee your debts are paid off should the unexpected happen, so your beneficiaries can continue to live comfortably.

If this sounds like you, consider a different type of life insurance, such as:

• Mortgage life insurance: This plan covers your mortgage and will pay off the lender after you pass. Some banks offer mortgage life insurance as collateral, but rates could be higher than with a traditional insurance company.
• Credit life insurance: If you have a large loan, this type of life insurance will pay it off automatically when you die. Many institutions offer credit life insurance as collateral on loans, so compare quotes from banks, lenders, and insurance companies.
• Joint life insurance: A joint life insurance plan covers two lives on one policy, paying out death benefits after both spouses die. Surviving spouses typically do not receive any death benefits.
• Accidental death & dismemberment (AD&D): AD&D only covers accidental death, dismemberment, or permanent impairment, such as blindness. Usually, AD&D insurance is sold as a type of guaranteed issue life insurance.

Mortgage and credit life insurance are term policies, only lasting for the duration of the loan.

Joint life insurance and AD&D may be term or permanent, depending on your needs and insurance company. However, AD&D will not have a cash-value component like other permanent life insurance policies.

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Factors That Affect the Price of Life Insurance

Age is one of the biggest determining factors in life insurance rates. On average, term life insurance for a healthy 30-year-old costs $26 per month, while monthly whole life rates average around $120. After 60, your life insurance rates will double with most companies. Take a look at the average monthly term life insurance rates by age and gender below.

20-Year Term Life Insurance Monthly Rates by Age, Gender, and Coverage Limits

The younger you are when you apply for life insurance, the lower your rates will be. Compare quotes from the best life insurance companies for young adults to learn more. Older adults typically pay more, and they may want to search for the best types of life insurance for seniors.

Other factors that impact the cost of life insurance are:

• Policy: The type of life insurance you buy is important, as term life costs considerably less than permanent life insurance.
• Coverage limits: Life insurance coverage varies between $100,000 and $1 million. Leaving behind a larger death benefit for your family will cost more.
• Gender: Women statistically live longer than men and enjoy cheaper life insurance rates on most policies.
• Health: Life insurance companies sort you into a risk class based on your current health. Those in poor health, with high blood pressure or cholesterol, for example, will pay higher rates.
• Family medical history: Your life insurance rates will be higher if you have a history of heart disease or other high-risk diseases in your family.
• Smoking habits: Non-smokers pay significantly less for all types of life insurance than smokers.
• Driving record: DUIs, reckless driving, and other charges that endanger your life will raise your insurance rates.
• Career: Policyholders with high-risk occupations, such as loggers, pilots, or construction workers, will pay more for life insurance.
• Lifestyle: High-risk hobbies like skydiving, snorkeling, or extreme sports will raise your life insurance rates.

Do not withhold any information about your health or lifestyle when applying for life insurance. If your insurer finds out you lied about your occupation, hobbies, or smoking habits, you will lose coverage and could be charged with insurance fraud.

How to Save Money on Life Insurance

Even if you’re considered high-risk for life insurance, you can often lower your life insurance rates by paying premiums upfront or making healthier lifestyle choices before re-applying.

Our top tips for saving money on life insurance are:

• Buy term life insurance. Term life insurance rates are $100 less per month than whole life insurance.
• Buy life insurance when you’re young. Healthy non-smokers in their 20s and 30s get the best life insurance quotes.
• Buy group life insurance. You are likely to get the best life insurance rates possible if you can qualify for coverage through an employer.
• Work with a life insurance agent. A certified life insurance agent can help you find discounts, riders, and more. These are the top questions to ask an agent when getting life insurance quotes.
• Compare free life insurance quotes online. Free online quote tools enable you to compare types of life insurance from multiple insurance companies at once. Follow our guide on how to get free online insurance quotes.

Reducing policy coverage is another way to save money on life insurance, but you risk leaving your beneficiaries behind to cover debts, especially if you are the sole breadwinner. Speak with an agent about other ways to lower life insurance rates and compare quotes online before reducing benefits.

Find the Best Plan by Comparing Several Types of Life Insurance Companies

Deciding which life insurance is best will take some research. Your health and medical history will determine how much coverage you qualify for, but research the minimum benefit amount you need to cover funeral costs, pay any debts, and provide for your family after your death.

The most common type of life insurance is term life. It has the lowest monthly rates, but policies only last for a specific number of years, typically 10-20. You must buy permanent life insurance at higher rates for lifelong coverage.

Although it’s more expensive, your permanent life insurance premiums earn cash value — term life does not. Depending on the type of permanent life policy you have, you can invest this cash value in different stock markets and use it to cover premiums later in life.

There are inherent risks to investing in a policy, but a representative from any of the best life insurance companies to learn more about your options. Use our free tool below to get in touch with life insurance agents near you.

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