Types of Life Insurance
Choosing the right life insurance policy depends on many factors, including the length of the policy, how much you’re willing to spend and whether you can access policy money during retirement. Learn about the different types of life insurance to decide which one meets your needs.
- Written by Rachel Christian
Rachel Christian
Financial Writer and Certified Educator in Personal Finance
Rachel Christian is a writer and researcher for RetireGuide. She covers annuities, Medicare, life insurance and other important retirement topics. Rachel is a member of the Association for Financial Counseling & Planning Education.
Read More- Edited By
Matt Mauney
Matt Mauney
Financial Editor
Matt Mauney is an award-winning journalist, editor, writer and content strategist with more than 15 years of professional experience working for nationally recognized newspapers and digital brands. He has contributed content for ChicagoTribune.com, LATimes.com, The Hill and the American Cancer Society, and he was part of the Orlando Sentinel digital staff that was named a Pulitzer Prize finalist in 2017.
Read More- Financially Reviewed By
Eric Estevez
Eric Estevez
Owner of HLC Insurance Broker, LLC
Eric Estevez is a duly licensed independent insurance broker and a former financial institution auditor with more than a decade of professional experience. He has specialized in federal, state and local compliance for both large and small businesses.
Read More- Published: May 11, 2020
- Updated: December 5, 2022
- 4 min read time
- This page features 4 Cited Research Articles
- Edited By
What Are the Main Types of Life Insurance?
Term and permanent are the two main types of life insurance. The purpose of life insurance is to financially protect your loved ones after you die.
- Term Life Insurance
- Term life insurance guarantees coverage for a specific amount of time. Costs tend to be lower, making it an affordable option for younger people looking to ensure financial security for their family.
- Permanent Life Insurance
- This provides lifelong coverage and includes whole, variable and universal options. Costs tend to be higher but include flexible options such as a growing cash value you can borrow against.
What to Consider When Choosing Life Insurance
- Age
- Your age is perhaps the biggest factor in determining the best life insurance product for you. You typically have more options when you’re young.
- Health
- Healthier people pay less for life insurance. Nearly every policy will require you to undergo either a physical exam or a medical questionnaire in order to receive coverage.
- Affordability
- A term life insurance policy should be an affordable option that lasts a set number of years. Permanent life policies tend to be more expensive but can offer other benefits.
- Length of Coverage
- You may only want life insurance for a certain time period, such as when your kids are growing up. Or, you may want the peace of mind of lifelong coverage to help pay for funeral expenses and guarantee the financial well-being of your spouse.
Comparing Popular Types of Life Insurance
There are a few key features to consider as you explore life insurance coverage options.
All policies guarantee a death benefit, or the money your beneficiaries receive after you die.
If you purchase a term life policy, death benefit coverage may last 10, 20 or 30 years. Permanent life insurance death benefit coverage never expires.
Cash value is only a feature of permanent life insurance policies. This cash value can be borrowed against as a loan or used to pay policy premiums. You can access the money when you’re still alive and its value builds over time.
A premium is the payment you give your life insurance company in exchange for coverage.
Term insurance policies tend to be more affordable for younger people, but premiums vary depending on the length of your term. For example, 30-year coverage will cost more than 10-year coverage.
Term life premiums can stay level or increase over time. Whole life insurance features consistent premiums.
Universal life insurance offers the greatest premium flexibility. These policies typically allow you to pay your premiums at any time in any amount following receipt of your first premium payment.
| Features | Term Life Insurance | Basic Whole Life Insurance | Universal Life Insurance |
|---|---|---|---|
| Duration | 10, 20 or 30 years | Lifetime | Lifetime |
| Guaranteed Death Benefit? | Yes | Yes | Yes |
| Cash Value? | No | Yes | Yes |
| How Cash Value Grows | N/A | Earns interest at a predetermined fixed rate. | Cash value earns interest based on the current market or minimum interest rate, whichever is greater. |
| Premiums | Can increase periodically or stay level. | Stays level. | Varies. Can be customized by policy owner. |
| Risks | No risk of losing coverage but no cash value when term ends. | You may find better investment opportunities elsewhere. | Cash value rates aren't guaranteed and can decrease after purchasing the policy. |
Another type of life insurance is called credit life insurance. This type of life insurance is designed to pay off your debts in the case of your unexpected death. Credit life insurance policies are designed to protect your creditors rather than protect your loved ones.
Using Life Insurance to Pay for Retirement
Life insurance retirement plans offer access to cash you can use in retirement.
When you have a cash value life insurance policy, a percentage of your premiums are earmarked to an investment-like account.
Over time, you can tap into this money by withdrawing from it or taking out a loan against it.
- Tax-deferred accumulation
- Asset protection
- Tax-free distributions
- No contribution limits
- Potential for long-term care benefits
But life insurance retirement plans may not be right for everyone. They tend to be more popular with high-income earners.
Wealth management expert Michael Jankowski notes in a 2019 Forbes article that these plans should not replace your 401(k) plans or IRAs. Max out contributions to those tax-deferred accounts first, Jankowski suggests, before pouring money into a life insurance retirement plan.
Other drawbacks may include high premiums and relatively low returns when compared with other investment options.
- Member of the Association for Financial Counseling & Planning Education
- Certified educator in personal finance
- Former member of the American Finance Association
4 Cited Research Articles
- Jankowski, M. (2019, April 30). Life Insurance Retirement Plans: Are They A Good Choice For You? Retrieved from https://www.forbes.com/sites/forbesfinancecouncil/2019/04/30/life-insurance-retirement-plans-are-they-a-good-choice-for-you/#46d48de6cdb2
- Department of Insurance, Securities and Banking. (n.d.). Life Insurance: Review Your Policy to Secure Your Family's Future. Retrieved from https://disb.dc.gov/page/life-insurance-review-your-policy-secure-your-familys-future
- Insurance Information Institute. (n.d.). How to choose the right type of life insurance. Retrieved from https://www.iii.org/article/how-choose-right-type-life-insurance
- Office of Public Insurance Council. (n.d.). What is Life Insurance? Retrieved from https://www.opic.texas.gov/life-insurance/basics/
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