Types Of Life Insurance Policies

Different Types of Life Insurance

There are two main types of life insurance: term life and permanent life. Then, there are several subtypes of permanent life insurance to consider.

Compare Different Types of Life Insurance

Life insurance types are often distinguished by how long the policy can last, whether it builds cash value, and whether the premiums or death benefit can be variable.

Type of life insurance	Policy length	Cash value	Premiums	Death benefit
Term life	Level term period varies, but often can be 10, 15, 20 or 30 years	No	Multiple options: Level, annual renewable, decreasing	Fixed
Whole life	Permanent	Yes	Level	Fixed
Universal life	Permanent	Yes	Might be flexible	Might be flexible
Variable life/variable universal life	Permanent	Yes	Level	Might fluctuate
Burial life	Permanent	Yes	Level	Fixed
Survivorship life	Permanent, typically	Yes	Varies	Paid out after second person dies
Mortgage life	Policy in effect for duration of mortgage	No	May fluctuate	Declining death benefit as you pay down mortgage
Credit life	Permanent, typically	No	Level	Pays off remaining debt to the lender
Supplemental life	Connected to your employment	No	Low or no cost	Fixed

Term Life Insurance

The basics:

Policy length: Common level term periods include 5, 10, 15, 20 or 30 years
Cash value: No
Premiums: Level, annual renewable or decreasing
Death benefit: Fixed

How it works: Term life insurance has a specific end date for the level term period, when rates stay the same. After this period you can renew the policy, but at higher rates each year. Choices of coverage lengths are generally 5, 10, 15, 25 or 30 years. It’s the cheapest way to buy life insurance because you’re buying only insurance coverage and not paying for cash value life insurance.

Who is it for: Term life insurance is ideal for people who want life insurance coverage for a specific debt or situation. For example, some people buy it to cover their working years as income replacement for their family in case they pass away. Some people buy term life to cover the years of a mortgage or other large debt.

Downside: If you still need coverage after the level term period expires, you could find the renewal rates to be unaffordable. And buying a new life insurance policy could be extremely pricey based on your age and any health conditions you’ve developed.

Whole Life Insurance

The basics:

Policy length: Permanent
Cash value: Yes
Premiums: Level
Death benefit: Fixed

How it works: Whole life insurance can provide coverage for the duration of your life. An account within the policy builds cash value over time by using part of your premium payment and adding interest. A policy will have built-in guarantees that the premium will not increase, the death benefit remains the same, and the cash value will earn a fixed rate of return.

Who is it for: Whole life is suited for people who want lifelong coverage and are willing to pay for the guarantees provided by the policy.

Downside: Because of the guaranteed features, whole life insurance is one of the more expensive ways to buy life insurance.

Universal Life Insurance

The basics:

Policy length: Permanent
Cash value: Yes
Premiums: Might be flexible
Death benefit: Might be flexible

How it works: Universal life insurance (UL) can be hard to understand because there are a few varieties and with very different features. Universal life insurance can be cheaper than whole life insurance because it generally doesn’t offer the same guarantees.

With some forms of universal life you can vary premium payments amounts and rejigger the death benefit amount, within certain limits. UL policies often have a cash value component.

Who is it for: Universal life insurance can be good for someone looking for lifelong coverage. Some varieties of UL are suited for people who want to tie their cash value gains to market performance (indexed and variable universal life insurance).

Downsides: If cash value is your main interest, not all UL policies guarantee you’ll make gains. And if you’re interested in flexible premiums payments, you have to stay on top of your policy’s status to make sure that the policy’s fees and charges don’t deplete your cash value and cause it to lapse. Understand what’s guaranteed within a UL policy and what isn’t.

Burial and Funeral Insurance

The basics:

Policy length: Permanent
Cash value: Yes, typically
Premiums: Level
Death benefit: Fixed

How it works: You may see this kind of policy called burial, funeral or final expense insurance. No matter the name, it’s usually a small whole life insurance policy that’s intended to pay only for funeral costs and other final expenses. Burial insurance is often offered as a policy that you can’t be turned down for and that doesn’t require a medical exam.

Who is it for: These types of policies are generally for people in poor health who don’t have other life insurance options and who need insurance for funeral expenses.

Downsides: Burial insurance policies are expensive, based on the amount of coverage you get for your money.

Burial insurance policies also have a safeguard for the life insurance company: Your beneficiaries won’t get the full death benefit if you pass away within two or three years after buying the policy. Check the policy’s timeline for these “graded death benefits.” Your beneficiaries might receive only a refund of the premiums you paid in, plus some interest.

Survivorship Life Insurance

The basics:

Policy length: Permanent, typically
Cash value: Yes, typically
Premiums: Varies
Death benefit: Paid out after the second person dies

How it works: These joint life insurance policies ensure two people under one policy, such as a husband and wife. The payout to beneficiaries is made when both have passed away. You may see them called second-to-die life insurance, but for understandable reasons the industry is moving away from this name.

Survivorship life insurance can be less expensive than buying two separate life insurance policies, especially if one of the people has health issues.

Who is it for: Survivorship policies can be beneficial in estate planning when the life insurance money is not needed by a beneficiary until both of the insured people have passed away. Survivorship life insurance might be used to fund a trust, for example. It’s also suited for high net worth couples who want to provide money to heirs for estate taxes. Or it could be used by a couple to provide a donation to charity.

Downside: If two spouses are insured and one would suffer financially if the other passed away, this is not the right policy type. The surviving spouse does not receive any life insurance benefits. The payout is only made when both have passed away.

Mortgage Life Insurance

The basics:

Policy length: Duration of your mortgage
Cash value: No
Premiums: May fluctuate
Death benefit: Declining death benefit as you pay down mortgage

How it works: Mortgage life insurance is designed to cover only the balance of a mortgage and nothing else. This policy type is different from the life insurance types above in two major ways:

The death benefit is paid to the mortgage lender, not a beneficiary that you choose.
The payout is the balance of the mortgage, or partial balance if that’s what you insured.

Who is it for: Mortgage life insurance is intended for people who are primarily concerned about their family being burdened by the mortgage if they pass away. It can also be appealing to someone who doesn’t want to take a medical exam to buy life insurance.

Downside: This type of policy won’t provide financial flexibility for your family because the payout goes to your mortgage lender.

If you’re looking for life insurance to cover a mortgage or other debts, you’re better off with term life insurance. You can choose the term length and amount, and provide more than just mortgage money to your family. Your family can use a payout for any purpose. They may decide to use the money elsewhere.

Credit Life Insurance

The basics:

Policy length: Permanent, typically
Cash value: No
Premiums: Level
Death benefit: Pays off remaining debt to the lender

How it works: Like mortgage life insurance, this insurance covers a specific debt. When you take out a loan you might be offered credit life insurance. The payments can usually be rolled into your loan payments. The life insurance payout is the balance of the debt and it’s paid to the lender, not your family.

Who is it for: If you’re concerned about how your family would pay a certain debt if you passed away, credit life insurance might look appealing and convenient. It can also be attractive because there’s no medical exam required to qualify.

Downside: Credit life insurance is very narrow and doesn’t allow financial flexibility in the future. You’re probably better off with term life insurance, which you can use to cover many concerns, from debt to income replacement to funeral expenses. A broader policy like term life will give your family more financial options if you pass away.

Supplemental Life Insurance

The basics:

Policy length: Connected to your employment
Cash value: No
Premiums: Low or no cost
Death benefit: Fixed

How it works: The life insurance you may have through work is supplemental life insurance, also known as group life insurance. It sets rates based on the group, not the individual.

Who is it for: Because usually it’s free or inexpensive, group life insurance is a good value. It’s good as supplementary coverage to your own individual life insurance policy.

Downside: If you lose the job you generally lose the life insurance, too. That’s why it’s best to have your own life insurance that’s not tied to the workplace. Plus, on your own you can buy higher amounts of insurance.

Types of Life Insurance By Underwriting Method

Insurance companies use life insurance underwriting to assess a person’s health and risk—and decide what to charge for premiums.

Fully Underwritten

Medical exam required.
Usually a lengthy application process with multiple questions related to health, family history. lifestyle and hobbies.
These are often the cheapest policies—even if you have some health issues—because the life insurance company collects a lot of information about you.

Accelerated Underwriting

No life insurance medical exam required.
Application will ask some health questions.
The insurance company will use third-party data about you to make a decision, such as information about your prescription drug history.
In some cases a policy that had accelerated underwriting can be competitively priced with a fully underwritten policy, but not always.
If red flags come up in the data analyzed by the insurer, you might be asked to go through a full underwriting process with a medical exam.

Simplified Issue

Doesn’t require a medical exam.
Applicants answer a handful of health-related questions and a “yes” answer could result in denial.
The insurance company may use third-party data about you to make a decision.

Guaranteed Issue

You can’t be turned down.
Doesn’t require a medical exam.
No health questions asked.
Often the most expensive way to buy life insurance.

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