What Type of Life Insurance is Best for You?
How Many Main Types Of Life Insurance In The World?

Life insurance is a contract between an insurer and a policy owner. A life insurance policy guarantees the insurer pays a sum of money to named beneficiaries when the insured dies in exchange for the premiums paid by the policyholder during their lifetime.

For the contract to be enforceable, the life insurance application must accurately disclose the insured’s past and current health conditions and high-risk activities.

What are the basic features of a life insurance policy?

At its core, a life insurance policy is a promise: to provide financial protection to your loved ones if you’re not there. The way a policy carries out that promise is defined by a few key features:

  • The death benefit: The amount of money the insurance company will pay when the insured person dies. Typically, this benefit is income-tax-free.
  • The beneficiaries: The person or people who get the death benefit. It can all go to a single person (e.g., a surviving spouse), or it can be divided by percentage among a few people (e.g., a spouse could get 50%, and two adult children could each get 25%). And by the way, a beneficiary doesn’t have to be a blood relative or even a person – if you choose, you can leave all or part of your death benefit to an entity, such as a charitable cause.
  • The policy length or term: The time period that the insurer agrees to pay a death benefit. In a term policy, it’s defined as a specific number of years, such as 10, 20, or 30. A permanent policy lasts for the life of the insured, for whole life as long as premiums are paid, and for universal life as long as the policy is funded properly to pay monthly expenses.
  • The premium - The monthly or yearly payments needed to keep the policy in effect.
  • The cash value - The policy’s investment component that builds over time and can be cashed out or borrowed against. A term policy has no cash value.

What type of life insurance is best for you?

Term life insurance policies are usually the best solution for most people who need life insurance. They’re generally the most affordable, simple to understand, and they provide the straightforward protection that most people shopping for a policy would want.

That doesn’t mean that other life insurance policy types are wrong for everyone. Some people tout the benefits of a permanent life insurance policy as a "forced savings vehicle”. Many people struggle to adequately save for retirement, and a permanent policy provides separate cash accumulation for something they’d be paying for anyway (their life insurance policy).

Simplified issues and guaranteed issue life insurance are options for people who might not be able to otherwise get insured because of age or poor health. Final expense insurance is available for elderly consumers who don’t want to burden their families with burial costs.

You should always speak to a licensed independent broker or a financial advisor to determine the best insurance company and policy for you. They can help you weigh out the pros and cons of each type of coverage and help you buy the right type of insurance for your needs.

What are the different types of life insurance?

1. Term life insurance

Photo: thetips
Photo: thetips

A term life policy is exactly what the name implies: Coverage for a specific term or length of time, typically between 10 and 30 years. It is sometimes called “pure life insurance” because, unlike whole life insurance, there’s no cash value to the policy. It’s designed solely to give your beneficiaries a payout if they die during the term.

Most individual term policies have level premiums, so you pay the same amount every month. When the term expires, there’s no more coverage – you either have to go without or get a new policy, which will likely come at a higher cost: the older you are, the more expensive it is to get a policy. However, many providers – including Guardian – will allow you to convert a term policy to permanent life insurance for part or all of the coverage period. If you receive term life insurance through an employer, rates are typically issued “on attained age,” which means the rates will increase over time.

This calculator can help you determine the cost of term life insurance at the coverage level you want. How many years will your family need financial protection? For most people, it’s until the kids are grown up, the house is paid off, and there’s some money that can serve as a safety net for the surviving spouse.

2. Whole life insurance

Photo: investopedia
Photo: investopedia

A whole life policy is the simplest form of permanent life insurance, providing coverage that lasts your entire life. Like other permanent policies, it includes a cash value component: A portion of your premium dollars are placed into a cash-value account, and this sum grows over time on a tax-deferred basis, so you don’t pay taxes on the gains.

Compared to other forms of permanent coverage, a whole life policy has three defining characteristics:

  • The level premium remains the same for the life
  • The death benefit is guaranteed as long as the guaranteed premiums are paid
  • The policy includes guaranteed cash values that grow at a guaranteed rate

Cash value provides several significant benefits you can use while you’re still alive. It takes a few years to grow into a useful amount, but once that happens, you can borrow money against it, use it to help pay your premiums, or even surrender it for cash to live on in retirement.

When you get a whole life policy from a mutual company, such as Guardian, your cash value can also earn annual dividends. You get a portion of the insurer’s profits, which can be used to increase the value of your policy and provide other benefits. While not guaranteed, Guardian has paid a dividend to its qualified whole life policyholders every year since 1868.

What is the difference between Whole Life vs. Term Life Insurance?

Key differences between term and whole life insurance include:

  • The policy length: A whole life policy lasts your entire life, while a term policy only provides coverage for a limited number of years. Once the term expires, your beneficiaries are no longer entitled to a death benefit.
  • The cash value: A term policy has no value once it expires. A whole life policy is a life-long asset that can be accessed to help meet financial goals up to and after retirement.
  • The premium: For a given death benefit – e.g., $100,000 – premiums will be higher for whole life, along with the certainty that your beneficiaries will eventually be paid a death benefit.

3. Universal life insurance

Photo: slideshare
Photo: slideshare

A universal life policy is another form of permanent insurance that offers the cash value and lifetime coverage benefits of the whole life. But there’s a fundamental difference compared to whole life: the premiums are flexible.

With a universal policy, you can raise or lower the amount you pay into the policy as you see fit, within the limits of the policy. Paying in less could eventually result in the need to pay in higher amounts in later years to keep your coverage. This type of policy can adjust to your life circumstances while providing the same kind of cash value growth as your whole life. Having another child, moving on to a different job, or taking out a loan to buy a business – all might be instances where a combination of security and flexibility becomes important.

4. Final Expense Insurance

Photo: novelwealth
Photo: novelwealth

At first glance, final expense insurance (or burial insurance) seems to make sense because it’s relatively cheap. Flashy advertisements will suggest you’re sparing your family the burden of paying for your funeral. It’s all about “peace of mind” in knowing your funeral expenses are covered before you die, right?

But burial insurance, which is also a type of cash value insurance, is a completely emotional purchase that makes absolutely no sense financially. Your funeral is something you can plan to pay for if you simply set aside $50 a month every month starting at age 55.

Let’s say you live to the ripe age of 78 years old (the average lifespan in America).1 That’s 23 years of socking away $50 a month or more than $13,000—and that’s assuming you don’t invest the money! If you invest it with your other savings and earn just 10% a year, you’ll have saved almost $53,000! Since the median cost of a funeral is around $7,000, why not just save up the money to pay for your own funeral and tell the insurance company to take a hike?

5. Simplified issue and guaranteed issue insurance

Photo: nomedicallifeinsurance
Photo: nomedicallifeinsurance

Most life insurance policies are underwritten: they require a medical exam as part of the application process so that the provider can assess your risk to insure. Simplified issue and guaranteed issue policies don’t require a medical exam. These plans are primarily designed for older applicants or those with serious health problems who may not qualify for policies that require a medical exam.

Some term policies and most final expense policies are either simplified issues or guaranteed issues. When applying for a simplified issue policy, you’ll be asked to fill out a health questionnaire in place of an exam. With a guaranteed issue policy, you won’t be asked to undergo an exam or complete a questionnaire – no medical information is needed to qualify for approval. These policies typically offer lower levels of coverage compared to other types, and premiums tend to be higher because the insurance company has to assume that there’s a high risk to providing coverage.

6. Group life insurance

Photo: spectrumfa
Photo: spectrumfa

This is life insurance that you buy as part of a group – typically through work as part of your employee benefits package, or via a member organization. Most group life insurance is a term, but some companies also offer permanent coverage as a voluntary (employee-paid) benefit.

Until recently, individual policies – bought through agents or directly from insurance companies – were the most common way to get life insurance. Now, more Americans are covered by employment-based group policies. These plans offer relatively affordable premiums because the company or organization is effectively “buying in bulk.” Some employers even provide workers with term coverage equal to 1x their salary at no cost to the employee. Group policies may also be a simplified issue, at least for lower coverage amounts, which helps employees with health issues obtain coverage. On the other hand, coverage amounts can be limited.

Group life may not provide the comprehensive coverage you want, but it can be an easy, affordable way to start or supplement your life insurance protection. If available, find out if the policy is portable: that means that if you leave your job, you can take your coverage with you.

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Other Types of Life Insurance Policies

The two primary types of life insurance—term life and permanent life—are just the tip of the iceberg. Insurance companies also offer dozens of other insurance policies, each designed to pay death benefits in different ways. Here’s a brief overview of the other types of life insurance you may encounter when you’re shopping around.

No Medical Exam Insurance

Photo: ramseysolutions
Photo: ramseysolutions

Applying for either a term or whole life policy in the past was kind of like trying out for a sports team—you had to get a complete medical screening just to get started! We’re talking blood draw, body weight, and drug screening! But due to the COVID-19 pandemic, no medical exam policies and touchless exams have become the norm. Top-shelf companies now offer this approach at the same rates as options that require a medical exam. There are two sub-types of life insurance without a medical exam:

  • Simplified Issue Life Insurance: These policies don’t require a medical exam, but they do require applicants to answer a health questionnaire.
  • Guaranteed Issue Life Insurance: The guaranteed issue has even fewer strings attached than the simplified policy—you don’t even have to answer any questions about your health! Many companies limit this type of coverage to people who are at least aged 40, and some companies don’t offer it to those over 80. But if you’re in that wide range, you’re probably gonna qualify. One drawback here is that your policy will be under what’s known as a graded death benefit. In other words, if you as the policyholder pass away within the first few years of buying, your beneficiaries would receive only a defined portion of the full death benefit. This type of policy allows those who’ve been declined for other kinds of life insurance due to health issues to get enough life insurance to cover final expenses after death.

Joint Life (First-to-Die) Insurance

Photo: planeasy
Photo: planeasy

Joint life insurance, also called first-to-die insurance (yikes!), is a cash value policy marketed to couples who want to share a policy between them. Think of joint life insurance policies as the joint checking account of the life insurance world. The policy covers two individuals for one fee. These policies pay a death benefit as soon as the first spouse dies.

And there’s the problem: If your finances are like most families, one spouse makes more than the other—and sometimes a lot more. Remember, the job of life insurance is to replace someone’s income in the event of their death. Joint life insurance takes a one-size-fits-all approach and pays out the same benefit to either spouse.

That means you could be paying a lot more to insure your spouse’s part-time income from the local fabric store than you would if you were to simply buy two-term life policies. A joint life policy doesn’t make a whole lot of sense when you weigh the costs.

Survivorship (Second-to-Die) Life Insurance

Photo: spectruminsurancegroup
Photo: spectruminsurancegroup

If joint life insurance policies don’t make much sense, then survivorship or second-to-die insurance life policies are a complete waste of your money (and doubly hard to talk about). We recommend you avoid survivorship life policies altogether because a survivorship life policy, which is also a type of cash value policy, pays absolutely zero benefits to anyone until both spouses die. Then, it pays your kids.

Survivorship policies are primarily geared toward wealthy people wanting to avoid large estate taxes on what they leave behind. They aren’t really intended to cover your spouse at all. Plus, your spouse isn’t covered when you die. So yes, you guessed it. As with all cash value policies, here’s the broken-record message: You and your spouse are better off getting a term life policy and then investing in a good mutual fund instead.

How Much Does Life Insurance Cost?

The cost of life insurance varies significantly depending on several different factors. One of the biggest cost factors will be the type of life insurance you buy. For example, a term life insurance policy is significantly less expensive than a whole life insurance policy for the same amount of coverage.

Here are some of the most common factors affecting life insurance rates:

  • Age. The younger you are when you buy a policy the less you’ll pay. That’s because your chance of death is smaller.
  • Sex. Females have a life expectancy that is nearly five years longer than males, according to the National Center for Health Statistics. This means that men generally pay more for life insurance than women (except in Montana where insurers must provide gender-neutral life insurance rates).
  • Health. Your health has a major impact on your life insurance rates. The insurer will evaluate your past and current medical conditions in order to calculate your life expectancy.
  • Lifestyle. Your driving history (such as a DUI conviction), criminal record, and dangerous occupations and hobbies (such as scuba diving) can all result in higher life insurance rates.

How to Choose a Beneficiary

A life insurance beneficiary is a person who can claim the death benefit after you pass away.

You can name multiple beneficiaries and decide what percentage they each will receive when you die. Additionally, you should add contingent beneficiaries who will receive the death benefit if your primary beneficiaries have died.

Not everyone names people as beneficiaries. Some people name trusts. By creating a revocable living trust and naming it as the life insurance beneficiary, you can ensure that the money is used according to your wishes. For example, the trust money could be used to take care of children.

If you decide to name a trust the beneficiary of your policy, make sure to work with an attorney to structure the trust correctly. It’s also wise to work with a financial planner so that trust is part of your larger financial plan.

It’s crucial to update and review your beneficiary selections regularly. For example, life events such as a marriage or a divorce can impact your selection.

To update your beneficiaries, contact your life insurer and submit a change of beneficiary form. Making changes only on a will won’t affect life insurance.

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