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Life insurance can help replace your income after your death, cover your burial expenses and debts or leave wealth to your loved ones. But it's not always clear which type of life insurance will fit your needs best.
There are several types of life insurance, including term life insurance, whole life insurance, universal life insurance and variable life insurance. Understanding all the options will help you choose the best life insurance for your family's needs.
| Types of Life Insurance | |||
|---|---|---|---|
| Coverage Period | Medical Exam Required? | Accumulates Cash Value? | |
| Term | Limited to a set term | Usually | No |
| Whole | Lifetime coverage | Usually | Yes |
| Universal | Lifetime coverage | Usually | Yes |
| Variable | Lifetime coverage | Usually | Yes |
| Final expense | Lifetime coverage | No | No |
Term Life Insurance
Term life insurance lasts for a specific term, which can range from one to 30 years. Premiums generally stay the same for the entire term. If you die before the term ends, your beneficiaries receive a payout (called a death benefit).
Once the term ends, you may be able to renew your policy or may need to purchase a new one. Either way, you can expect to pay more this time around, because life insurance premiums typically rise as you get older.
- Benefits: More affordable than whole life, universal life or variable life insurance; level premiums; flexible term options to fit your needs.
- Drawbacks: Policy has no cash value; coverage term is limited.
- Who it's best for: Younger people who want affordable coverage for a certain period. For example, you might buy 30-year term life insurance so your family can pay off your 30-year mortgage if you die.
Learn more >> What Is Term Life Insurance?
Whole Life Insurance
Whole life insurance is one kind of permanent life insurance. Coverage lasts your whole life (or up to age 99, depending on the policy). Premiums and death benefits typically stay the same for the duration of the policy.
Part of your whole life premium payments are placed in a tax-deferred savings account that grows at a guaranteed rate of interest, building cash value. Some whole life policies also pay dividends, adding to the cash value. You can withdraw from the cash value, borrow against it or use it to pay premiums. However, any money you borrow or withdraw reduces the death benefit.
- Benefits: Protection lasts your whole life; you can use the accumulated cash value during your lifetime.
- Drawbacks: Up to 10 times more expensive than term life insurance; unused cash value reverts to the insurance company at your death.
- Who it's best for: People who are maxing out their retirement and health savings accounts; those who can afford the premiums; those who want to leave an inheritance for family members.
Universal Life Insurance
Another type of permanent life insurance, universal life insurance (sometimes called adjustable life) provides coverage for your entire lifetime or up to 99 years, depending on your policy.
Like whole life insurance, it builds cash value you can withdraw, borrow from or use to pay premiums. Your cash value account typically earns interest at the same rate as a money market account. Once your cash value reaches a certain level, you can modify your premiums and death benefit to fit your financial needs.
- Benefits: Lifetime coverage; cash value you can access without a credit check; flexibility to adjust premiums and death benefit.
- Drawbacks: More expensive than term life insurance; no guaranteed interest rate; can be complex to manage.
- Who it's best for: People who want the benefits of whole life insurance plus the flexibility to change premiums and payouts.
Learn more >> What Is Universal Life Insurance?
Variable Life Insurance
Variable life insurance is permanent life insurance that allows you to choose how the policy's cash value is invested, typically in a range of mutual funds. It's riskier than other types of permanent life insurance and usually involves substantial fees and other costs.
Depending on how your investments perform, you could either earn higher returns or lose money. If the policy's cash value drops low enough, your policy could be terminated, leaving your beneficiaries without a death benefit.
A similar option, variable universal life insurance, allows you to adjust premium payments and coverage like universal life insurance does.
- Benefits: Lifetime coverage; potential for higher returns; flexibility to control investment decisions.
- Drawbacks: Risk of losing money; high fees; policy could lapse if cash value drops too low.
- Who it's best for: People who are comfortable managing complex investments.
Final Expense Insurance
Final expense insurance is whole life insurance that typically has a death benefit of $5,000 to $25,000. It's designed to cover funeral expenses and other end-of-life costs, but payouts can be used for any purpose the beneficiary chooses.
Because death benefits are low, premiums are relatively low as well—usually just a few dollars a week. Both premiums and payout stay the same for the life of the policy.
- Benefits: Low premiums; payouts can be used for any purpose; level premiums and death benefits; no medical exam required.
- Drawbacks: Limited coverage amounts.
- Who it's best for: People who can't afford or qualify for other types of life insurance but want to cover their end-of-life costs.
Other Types of Life Insurance
In addition to the life insurance options mentioned above, there are some specialized types of life insurance you may want to consider.
Group Term Life Insurance
Some employers and organizations give employees or members limited amounts of group term life insurance as a benefit, generally paying all or part of the premiums. You can typically buy supplemental life insurance to increase your coverage. Some group term life insurance is convertible to an individual policy if you leave the job or organization.
Joint Life Insurance
Usually purchased by spouses, joint life insurance is one policy that covers two people. If you're both young and healthy, this can be more affordable than purchasing two policies. A first-to-die policy pays out when one spouse dies; the policy terminates at that point. A survivorship policy, which doesn't pay out until both spouses die, can be used to leave money to heirs.
Accidental Death and Dismemberment Insurance (AD&D)
AD&D insurance pays out if you are killed or permanently injured by the risks listed in the policy. For instance, it typically covers death or loss of limbs due to car accidents.
Mortgage Life Insurance
Also called mortgage protection insurance, this coverage pays off your mortgage if you die without paying it off. Because payouts decline as you pay down your mortgage, while premiums stay the same, standard life insurance makes more sense for most people. But since no medical exam is required, mortgage life insurance can be an option for people in poor health.
Credit Life Insurance
Sometimes called credit insurance, this coverage pays some or all of your outstanding personal loans after your death. You typically purchase this coverage when getting a loan. Premiums may be rolled into the loan, which can increase the cost of borrowing. Credit life insurance is often unnecessary: Unless you're in a community property state, your family usually isn't responsible for personal debts when you die.
No-Exam Life Insurance
Are you in poor health or want to avoid a medical exam? You can get no-exam life insurance by answering some questions about your medical history.
- Simplified issue life insurance, which also requires checking your medical records, typically offers coverage from $25,000 to $300,000.
- Guaranteed issue life insurance usually provides coverage of $25,000 or less. (Burial insurance is a type of guaranteed-issue life insurance.)
- Finally, there's instant life insurance, which can generally be issued within 48 hours. Instant life insurance usually maxes out at $1 million in coverage.
Learn more >> What Is No-Exam Life Insurance?
Frequently Asked Questions
You may need life insurance if you want to help provide financially for anyone who relies on your income or care, such as a spouse, parent or child. Single people without dependents don't necessarily need life insurance as much as those with dependents but may want it to cover funeral costs or leave money to a charity or loved one.
On average, life insurance for a healthy 30-year-old costs about $170 annually, according to insurance research organization LIMRA. Life insurance premiums vary based on factors including your age, health, gender and the amount and type of coverage you buy. Since premiums typically stay level for the life of the policy, buying life insurance when you're young and in good health can help minimize the cost.
Determine how much life insurance you need and which type makes sense for you, then shop around. Comparing quotes from various companies online is a good starting point. However, because life insurance is complex, consulting an independent insurance broker who works with multiple carriers can help ensure you choose the best policy for you. Check the insurance company's financial stability and customer service ratings before you buy.
The Bottom Line
Before you shop for life insurance, take a moment to check your credit score. Insurance providers in many states can consider your credit-based insurance scores when setting your premiums. These scores differ from consumer credit scores but are based on many of the same elements, including your payment history and existing debt. Lower credit-based insurance scores could mean higher life insurance premiums.
Taking action to improve your consumer credit score could boost your credit-based insurance score, too. Implement good financial habits such as paying down debt and paying bills on time, and you could save money on life insurance.