September is Life Insurance Awareness Month, the perfect time to chat about how we can protect the people we love with the help of life insurance. If you’ve ever asked yourself, “What types of life insurance should I consider?” you’re not alone. Life insurance isn’t always the easiest topic to bring up, but it's a financial option you should consider.
The good news? Once you understand the main types of policies available, the choices get a lot less intimidating. Let’s take a quick, high-level look at a few of the more common options to help you decide which might be a good fit for you and your loved ones.
The Two Big Buckets of Life Insurance
Life insurance generally falls into either of two main categories:
1. Term life insurance – coverage for a set number of years.
2. Permanent life insurance – coverage that lasts a lifetime, as long as premiums are paid.
Everything else is really a variation of these two buckets. Let’s break them down and see how the different types generally work.
What Is Term Life Insurance?
You might think of term life insurance as 'renting' coverage. You (the policyholder) choose a term (often 10, 20, or 30 years) and pay set premiums during that time. If something happens to you within the term, your beneficiaries receive the payout (known as the “death benefit”). If you outlive your term life insurance policy, however, there is no payout. The policy simply ends when the term expires. There’s no refund of premiums and no cash value built up with this type of insurance. There are a few exceptions to this that insurers may offer, but those vary by insurer.
📌 Why people might choose it: Usually the most affordable way to buy a large amount of coverage and it's good for covering temporary needs like a mortgage, raising kids, or replacing income during working years. This is the most commonly purchased type of life insurance because of its simplicity and cost.
Take note: There are actually two basic varieties of term life, level term and decreasing term. For this blog post we are only covering level term which is the most popular.
What Is Permanent Life Insurance?
If term life is like 'renting', whole life insurance can be thought of as more like 'owning' coverage. It is designed to remain in effect for your lifetime (as long as you pay your premiums) and premium payments are split between the death benefit, insurer's costs, and building your policy's cash value, which gets invested. Generally, once you've accumulated enough cash value you can borrow against the policy if needed.
What Are Some Of The Different Types of Permanent Life Insurance?
Whole Life Insurance
For whole life, the policy's cash value is invested by the insurance company, typically in stable stocks and bonds, and grows at a fixed rate. Premiums stay fixed, and the death benefit is guaranteed.
📌 Why people might choose it: Premiums are predictable and never go up. The policy builds cash value that grows steadily and provides lifetime coverage with no expiration date. This is the most common type of permanent life insurance.
Take note: Whole life costs more than term life and it can take years before the cash value becomes significant.
Universal Life Insurance
Universal life insurance is similar to whole life, but with more flexibility. With this type of insurance, you can adjust your premium payments and death benefit, within certain limits, to fit your changing needs. This means you can choose to pay more than the minimum to build cash value faster, or reduce your payments during a difficult time. Cash value of the policy is invested by the insurance company and interest is earned based on market rates.
📌 Why people might choose it: This type of policy is flexible and has a potential for faster cash value growth compared to whole life, while still offering lifetime coverage. If interest rates are low, however, cash value may grow more slowly than expected.
Take note: While universal life offers more flexibility than whole life, there is also less certainty.
Variable Life Insurance
With variable life insurance, the cash value is still held by the insurance company, but the policyholder makes the decision on which accounts to fund, bearing the investment risk and potential rewards. This means that the policy value, and potentially even the death benefit, can rise or fall with the market.
📌 Why people might choose it: You have control over investment choices and there's a potential for higher returns.
Take note: This is a more complex, hands-on type of policy that requires active management. There is investment risk and returns are not guaranteed. If the market performs poorly, your cash value and death benefit could shrink. Variable life insurance is best suited for individuals who are comfortable with risk and have a good understanding of investments. Because of the risk, the SEC requires variable universal life insurance to be sold as a securities product.
Indexed Universal Life Insurance
This type of policy ties cash value growth to a stock or bond index, like the S&P 500. The cash value isn't actually invested directly in the market, but the account is credited based on index performance, subject to a cap on gains and a floor that protects against losses. You have the ability to adjust your premiums to suit your financial situation and cash flow needs, provided that the cash value account is sufficient to cover the expenses of the policy.
📌 Why people might choose it: It offers market-linked growth with downside protection and flexible premiums.
Take note: Returns are capped, meaning you won’t capture the full upside of strong markets, so be sure to ask how caps and floors work for a particular policy before purchasing. These policies tend to have a complex fee structure and can vary from one insurance carrier to another. They also require active management and ongoing monitoring from the policyholder to ensure it remains adequately funded.
Final Expense (Burial) Insurance
This is a smaller type of permanent policy, often used to cover funeral and end-of-life costs. Coverage amounts are typically less than $25,000.
📌 Why people might choose it: There's typically only a simple application, sometimes with no medical exam. It helps to ensure loved ones aren’t left with end-of-life bills. The Insurance Information Institute notes that final expense policies are often purchased by older adults for peace of mind.
Take note: This type of insurance is more expensive per dollar of coverage than term or larger whole life policies.
Which Type of Life Insurance Is Right for You?
That is a question only you can answer. There’s no one-size-fits-all policy, so do your research and ask yourself: What do I want my policy to accomplish? How much coverage do I really need? The right choice is the one that balances your budget, your needs, your goals, and your comfort level.
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A Few FAQs About Life Insurance
Are there other life insurance options not mentioned here?
Yes, we only covered the main types here. Some insurance groups may offer hybrid policies or less common variations. Employers often offer group life insurance as well.
What is the cheapest type of life insurance?
Term life insurance is usually the most affordable option for the coverage amount you get.
Can you cash out a life insurance policy?
Some, yes. Permanent policies like whole, universal, or variable build cash value that can be accessed through withdrawals or loans. Term life has no cash value.
Do I need a medical exam to buy life insurance?
It depends. Many traditional policies require one, but final expense policies often don’t.
Is life insurance taxable?
Generally, death benefits are not taxable to beneficiaries. However, cash value withdrawals or surrenders may be taxable if they exceed what you paid in premiums.
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The information in this article is for general informational purposes only. The content is developed from sources believed to be providing accurate information, but it should not be considered a substitute for personalized guidance. The information in this material is not intended as tax or legal advice. Please consult with a qualified insurance professional, as well as legal or tax advisors, for advice tailored to your individual situation.