The Different Types of Life Insurance, Explained

You’ve probably heard of life insurance before, but you might not know the difference between term and permanent policies. Don’t sweat it. Life insurance can sound complicated at first, but understanding the basics can help you make confident decisions.

At its core, life insurance provides a death benefit that helps financially protect your beneficiaries (usually your family) if you die. But that’s just the start. Depending on the type of life insurance you choose, your policy could also become an integral part of your financial plan while you’re alive—from helping grow funds that you can access, for any reason at any time, to building wealth and weathering down markets in retirement and even being more tax efficient.¹

Here, you’ll learn about the different types of life insurance and how each can help you reach various goals.

What are the main types of life insurance?

There are two main types of life insurance: term and permanent. Term life insurance is often the most affordable way to get a large death benefit. That’s because term life insurance provides temporary protection—if you don’t die during the coverage period, the policy does not pay a benefit. Permanent life insurance, on the other hand, provides lifetime coverage and will pay a death benefit someday so long as it remains in place from sufficient premium payments and policy performance. In addition, permanent insurance accumulates cash value, which you can access during your life.

Now, let’s dive into how these main types of life insurance work.

Term life insurance

Term is one of the most common types of life insurance—and usually the most basic. With term life insurance, you pay an insurance company a premium for a set number of years—the term. The term could be a length of time, 20 years for example, or until you reach a certain age. If you die during the term, the insurance company will pay your beneficiary the death benefit. Once the term ends, you stop paying and the insurance expires, meaning no death benefit will be paid.

Premiums for term insurance are typically less expensive than for other types of life insurance with the same death benefit. That’s because term provides life insurance only for a certain time. With this in mind, outliving your policy means that your beneficiaries won’t receive a payout.

This makes term insurance useful when you may need a large death benefit to cover an obligation, such as a mortgage, or when you have a spouse or children that you want to ensure are taken care of should you pass away during this crucial time. You can plan for the coverage to end after you’ve paid off the mortgage or once your children are grown up.

Types of term life insurance

There are two main types of term life insurance: level and annually renewable. Learn about both of them below—and the option to convert them to permanent life insurance.

Level term life insurance

With level term, the amount you pay is the same for the entire term. Level term is good when you want certainty and don’t think you’ll need to change your policy in the future.

Annually renewable term life insurance

With annually renewable term insurance, premiums adjust each year. They are usually inexpensive when you’re young but rise as you get older.

Converting term life insurance to permanent life insurance

You may have the option to convert term life insurance to permanent life insurance in the future. Both level term and annually renewable term may be convertible. If you’re interested in converting your policy in the future, it’s a good idea to understand how the process would work before you purchase your base policy.

You may have the option to convert either at specific years—for example, five or 10 years into your policy—or before you reach a certain age (often 65 to 70). Sometimes, you can convert without having to take another health exam, but different policies have different rules.

Permanent life insurance

Unlike term, permanent life insurance coverage never expires. So long as the policy stays in place, it will pay a death benefit someday, regardless of how long you live. That’s why permanent insurance tends to be more expensive than a term policy, even for the same death benefit. Permanent policies also offer more than just a death benefit. They accumulate cash value, which you can access for any reason throughout your life.¹

Types of permanent life insurance

Because everyone’s financial picture is a little different, there are several permanent life insurance policy types that can fulfill specific needs.

Whole life insurance

Whole life insurance is the most common type of permanent life insurance. Whole life insurance offers certainty. Your premiums will never change, and your cash value growth is guaranteed (values may grow faster with dividends, but never less than what’s guaranteed in the policy). That makes whole life insurance an incredibly stable part of your overall financial plan. In retirement, you can use the cash value of whole life insurance to weather down markets (since the cash value isn’t directly tied to market fluctuations). Withdrawing or borrowing against cash value can also help you be tax efficient, if managed properly, particularly in retirement.²

Universal life insurance

Universal life insurance is like whole life insurance in that it accumulates cash value and has a death benefit that won’t expire. But unlike whole life insurance, which has fixed premiums, universal life insurance allows you to adjust the premium you’ll pay for your policy in any given year. There’s also more flexibility to raise or lower your death benefit. While more customization is a great benefit, it’s important to work closely with your financial advisor because paying too little can result in the policy lapsing (meaning you will lose your insurance).

Variable universal life insurance

Variable universal life insurance is like universal life insurance, but you can choose to invest your cash value in various subaccounts that are often tied to financial markets. That potential investment growth means you could see more upside with your cash value than you would get with a whole life insurance policy. But it’s important to understand that when you choose to invest your cash value, there’s no guarantee that it will always go up. In fact, the cash value can go up or down based on market volatility—which could lead to a lower death benefit in down markets..

Indexed universal life insurance

Indexed universal life insurance is similar to variable universal life insurance in that the policy’s cash value is tied to investments. But while the cash value of a variable universal life policy is dependent on various subaccount investments, the cash value of an indexed policy is typically based on one or more stock market indices, like the S&P 500, Nasdaq 100 or the Dow Jones Industrial Average.

The performance of the linked index (or indices) determines the policy’s cash value growth­­­­­­­—often with a cap and floor set by the insurance company. This means both gains and losses are limited, regardless of market performance, although policy values could still go down after expenses and fees are deducted.

Other types of life insurance

In addition to the types of life insurance above, you may also hear about others. Some other common types of life insurance include:

• Group life insurance. This is offered to a group of people rather than an individual. It’s typically something that you’d get through work. While the insurance you get through work is a great benefit, it’s often not enough. That’s why many people get additional life insurance, sometimes referred to as supplemental life insurance.
• Voluntary life insurance. This is usually offered as an optional benefit through group life insurance at work. But while group life insurance is typically offered as a part of your employment, voluntary life insurance is an added benefit that you choose (and usually pay for).
• Final expense insurance or burial insurance. This is a type of whole life insurance that’s typically just enough to cover the cost of final expenses like a funeral and burial. These types of policies are often purchased later in life by people who don’t already have whole life insurance coverage.

Is disability insurance a type of life insurance?

No, disability insurance isn’t a type of life insurance.

While life insurance is designed to provide a death benefit to your family after you die, disability insurance is designed to replace a portion of your income should you become injured or ill and are unable to work. Both short-term and long-term disability insurance are important additions to a comprehensive financial plan, alongside your life insurance policies.

How to decide between the different types of life insurance

When you’re comparing term and permanent life insurance, it’s important to remember that you don’t have to choose just one. Often, people have multiple policies to meet their goals. For instance, new parents might buy a large term policy for the death benefit and a small whole life policy to lock in additional guarantees and financial flexibility they can't get with term. Over time, they may convert some of their term to whole life to continue to grow the amount of whole life insurance they have. People who have more complex financial needs will often consider universal life insurance or variable universal life insurance.

Your financial advisor should ask deep questions and take the time to get to know you. That way, they can guide your overall financial plan and show you how the different types of life insurance could help you reach your goals. They can also help guide your investment strategy, including your retirement savings.