What Are the Different Types of Life Insurance?

Life insurance can be a blessing for your family when you die, but trying to figure out which are the different kinds of policies and which might be best for you can be daunting. We are here to help.

With life insurance, you pay for coverage now that can help financially protect your loved ones–also called beneficiaries–when you die. [1,2]

There are two main categories of life insurance–term life insurance and permanent life insurance.

Term life insurance policies are for a set amount of time, generally 10 to 30 years. You pay your premium during that time, and if you die during the coverage period, your family is compensated based upon your policy.

Permanent life insurance lasts your lifetime (as long as you keep paying your bills), so that you have coverage until you die, whenever that might be. In general, these policies are more expensive than term life insurance and can include an investment component, commonly known as cash value.

Let’s take a closer look.

Term life insurance

Term life insurance pays out a set amount of cash, or death benefit, to your beneficiaries if you die while you hold the policy. Coverage is bought for a set amount of time, or term. Those typically range from 10 to 30 years. You might also hear term life insurance called “pure life insurance.” [1,2]

If you outlive the length of your policy’s term, you won’t be able to get back any of the money you’ve put into your policy and your beneficiaries also won’t get any cash.

Term life insurance may be a good fit for anyone who wants to carry affordable coverage for a set amount of time. Many people get the coverage to help their loved ones replace some of their income when they die. It can help cover the cost of raising a child, paying off a mortgage or going to college.

Typically people will make their family the beneficiaries of their policy, but you can also opt to leave your benefit to a friend, put it in or trust or donate it to your favorite charitable cause.

Prices are reasonably affordable and you’ll most likely pay your premium on a monthly basis. Signing up for coverage when you’re younger can help you save as the cost typically goes up as you age. Once you’ve locked in your policy, your coverage and premium remain the same for the length of the policy.

“Term coverage is similar to renting in the fact that you do not build up any equity in the policy,” says David Radoccia, managing director of Pensionmark Meridien, a Providence, R.I.-based insurance and wealth management firm. “Term life insurance policies are typically less expensive.”

For example, a $500,000 term policy for a 25-year-old may only cost $20 per month and have a level premium for 10 years. The same policy for whole or universal life could cost five to ten times more than that, Radoccia says. There’s a reason for that, which we will get to next.

Permanent life insurance

Permanent life insurance offers coverage for your entire life (as long as you pay the premium!). One reason it’s more expensive than term life is because part of your premium turns into an investment, or as previously mentioned, cash value. You can generally draw on or borrow from that cash value.

There are several options for investments that could include having your money in a tax-deferred account similar to a savings account or having the cash value linked to a stock market index, like the S&P 500. Among the different kinds of permanent life insurance are whole life insurance, universal life insurance and variable life insurance.

Permanent life insurance is for people looking to get extra value out of their life insurance policy may opt for permanent life insurance over term.

A little bit about the different options of permanent life insurance:

• Whole life insurance includes a cash value that accrues interest at a fixed rate, and on a tax-deferred basis. The premium is fixed.

• Universal life insurance has fluctuating policy rates, death benefits and cash value growth rates over the life of the policy.

• Variable life insurance has fixed premiums and allows you to invest in “insurance wrapped investments,” akin to mutual funds. [3]

What you’ll pay for your life insurance premium depends on a few key factors, including:

• Type of coverage: The type of policy (term life or permanent life) you choose will have different costs as will the amount of death benefit coverage.

• Age: Rates tend to go up as you age, so lock yours in while you’re young.

• Health: While there are some policies that don’t require a medical exam, typically life insurance providers will want to know more about your health history. This may include your weight, if you smoke, any medical conditions you have and even your family medical history.

• Lifestyle: If you engage in risky behaviors, like skydiving or bungee jumping, your policy may cost you more than someone who has a less physically adventurous lifestyle.

• Where you buy it: Buying life insurance through your employer may be able to save you money, or could even be free in some cases as part of your compensation package. You may also be able to save by bundling your life insurance with your existing auto or home policies, if you opt to use the same carrier.

Deciding on how much life insurance you need to carry, and the type, truly depends on your personal situation. If you’re young and single with no children or assets like a house, you may decide to carry a very basic policy. If you have a family and assets, you may want more coverage.

Ask the experts

To find the coverage that’s going to work best for your needs and budget, make sure you do your research first. You can talk to your employer about what may be available through your work benefits. You may also want to talk to a lawyer, tax advisor or financial planner.

Choosing a life insurance policy can be difficult, but it can also help give you peace of mind that your loved ones will be financially taken care of.

And remember, even if you already have a policy, it’s a good idea to review your coverage needs from time to time. As you age or experience major life events, like getting married, buying a home, having a baby or retiring, you may want to switch policies or add additional coverage.