Types of Life Insurance Explained

Choosing the right life insurance type based on your financial goals and life stage can help you avoid overpaying for coverage. Whether you’re looking for short-term protection during financially vulnerable years or want the option to tap into your death benefit for cash, different types of life insurance offer distinct advantages.

Keep reading to learn what types of life insurance are available and how to choose the right policy.

Key Takeaways Term life insurance typically lasts for a set number of years or until a certain age. Whole life insurance, also known as permanent life insurance, offers lifetime coverage at a fixed rate but requires consistent premium payments, or you may void your policy. Whole life policies often build cash value, which you can withdraw early — though this reduces your death benefit. Some universal life insurance policies are tied to market performance and may pay less if the market declines.

What Are the Different Types of Life Insurance?

When you start shopping for life insurance, you'll quickly find that there are many types of life insurance policies to choose from. Some of the most common types include:

• Term
• Whole
• Universal
• Guaranteed
• Indexed
• Variable

If having so many choices feels overwhelming, a good starting point is understanding the difference between term and whole life insurance, which we’ll explain in the next section.

Term Life Insurance

Term life insurance provides coverage for a set number of years. It only pays a death benefit if you pass away during the term specified in your life insurance policy. The death benefit would go to a person of your choosing, known as the beneficiary. Keep in mind that if you outlive the policy term, you won't receive anything in return for the premiums you paid.^[1]

However, you can renew your coverage — typically at a higher rate — for a new term.^[1]

Term lengths vary by policy but are often available in increments of one, five or up to 30 years.^[1]

For example, with a 20-year term life insurance policy, you’ll pay monthly premiums during those 20 years. If you die during the term, your beneficiary will receive the payout. If not, you’ll have the option to renew for a new term.

In some cases, you can set the term to a specific age, such as turning 65.^[2]

Advantages of Term Life Insurance

The main advantage of term life insurance is that premiums tend to be lower because a payout is not guaranteed — it only occurs if you die during the coverage term.

You can also choose a term that aligns with periods of greater financial responsibility, such as while your children are still in school and rely on you for most of their expenses.

Disadvantages of Term Life Insurance

The main disadvantage of term life insurance is that if you outlive the policy term, you won't receive anything in return for the premiums you paid. Term life policies do not build cash value, and no death benefit is paid once the coverage expires.

Renewing the policy can also be more expensive because your risk of death increases with age.^[3]

Who Term Life Insurance May Be Right For

A term life insurance policy may be a good fit for a young, working family. In the early years of your career, when money may be tight, lower premiums can make term life a more budget-friendly way to get coverage.

Whole Life Insurance

Whole life insurance does not have a time limit. As the name suggests, it provides coverage for your entire life — as long as you continue to pay the premiums.

In addition to the guaranteed death benefit paid to your beneficiary, whole life insurance policies may also build cash value over time. This cash value can be accessed during your lifetime or left to loved ones as part of your estate.^[1]

Advantages of Whole Life Insurance

One key advantage of whole life insurance is that it guarantees a payout — as long as you keep the policy active. If you continue paying premiums, your beneficiary will receive a death benefit no matter when you pass away. For this reason, whole life is often referred to as permanent life insurance.

Over time, the policy may also build cash value, which you can borrow against or cash out. Just keep in mind that surrendering the policy for its cash value will result in the forfeiture of the death benefit.

Disadvantages of Whole Life Insurance

The main disadvantage of whole life insurance is that it typically costs more than term life insurance.^[1] That's because the insurer expects to pay out a death benefit at some point.

Also, while whole life policies accumulate cash value, they may not offer the same growth potential as other long-term investment options. You might be able to grow your money faster by investing elsewhere.

Who Is Whole Life Insurance Right For?

Whole life insurance may be a good fit for families with discretionary income who can afford the higher premiums.

While term life insurance tends to be more affordable when you’re young, whole life allows you to lock in lower premiums early — potentially saving money in the long run as premiums rise with age nd health risks.

Additionally, people with long-term dependents may find whole life insurance a good fit because the coverage does not expire after a set number of years.

Universal Life Insurance

Universal life insurance shares some characteristics with permanent life insurance but offers added flexibility in how you manage premiums, death benefits and cash value. With a universal policy, you can adjust the death benefit over time by increasing or decreasing your premium payments as needed.^[4]

This flexibility allows families to tailor their coverage to meet changing financial needs. You can also use the policy's cash value to cover premium payments, reducing your out-of-pocket costs.^[4] Additionally, some universal life policies let you choose how your cash value grows — such as through market performance or fixed interest.^[5]

Below, we’ll review a few common types of universal life insurance.

Guaranteed Universal Life Insurance

Guaranteed universal life insurance locks in your premium rate and provides a guaranteed death benefit. This means your beneficiary will receive a fixed payout, regardless of how financial markets perform over time. However, like whole life insurance, the policy may become void if you fail to make a premium payment.^[6]

Additionally, these policies typically offer little to no cash values, so there’s limited opportunity to grow your benefits over time.^[6]

Indexed Universal Life Insurance

If you’re looking for more growth potential in the cash value of your life insurance policy, indexed universal life insurance may be worth considering. This type of policy ties a portion of your premium to a market index — commonly the S&P 500, which tracks large U.S. companies.^[7]

When the index performs well, your policy's cash value can grow more quickly, offering greater upside than a guaranteed universal life policy. However, since market indexes fluctuate, there may be periods when your cash value sees little or no growth.

Insurance companies often limit cash value growth in two key ways:^[8]

• Participation rate: This determines the percentage of the market index return applied to your policy. For example, a 75% participation rate means you'd receive only three-quarters of the index’s performance.
• Cap rate: This limits the maximum percentage your cash value can grow in a given year. If your policy has a 12% cap, your return would be capped at that level even if the market gained more.

Depending on these limitations, you may earn more by purchasing a policy with lower premiums and investing the difference elsewhere.

Variable Universal Life Insurance

Variable universal life insurance shares growth characteristics with indexed universal life insurance, but with greater investment control. Instead of tying cash value growth to a market index, a variable policy lets you choose from a range of investment options, such as mutual funds. As with indexed policies, your cash value growth depends on how well your selected investments perform — and your returns may vary significantly from year to year.^[9]

Other Types of Life Insurance

Here are some brief descriptions of other life insurance types you may encounter:

• Burial insurance/final expense insurance: These policies pay relatively low benefits — typically just enough to cover funeral costs and other final expenses.
• Mortgage life insurance: This policy pays your mortgage lender the remaining loan balance if you die, helping ensure your family’s home is paid off.
• Joint life insurance: A policy shared by spouses. Depending on the structure, the death benefit may go to the surviving spouse after the first death or to another beneficiary after both have passed.^[10]
• Group life insurance: Often offered by employers, these policies are typically more cost-effective because risk is spread across a workforce. Employers may pay part or all of the premium.^[11]
• Accidental death and dismemberment (AD&D) insurance: Provides a death benefit if you die in an accident and may also pay if you suffer qualifying catastrophic injuries.

Types of Life Insurance by Underwriting

Underwriting is the process insurers use to asses the risk of a given policy. The more information an insurer has, the more accurately it can price premiums based on risk. With less information, premiums are usually higher to account for unknown or unaccounted-for risks.

In life insurance, a major part of the insurer’s risk assessment centers on your health. Policies generally fall into three underwriting levels based on how thoroughly your health is evaluated before coverage is issued:

• Full underwriting: This requires a detailed medical exam along with questions about your lifestyle and family medical history. If you're healthy, have no high-risk habits and come from a long-lived family, you may qualify for a lower premium. Full underwriting can be cost-effective for applicants in good health.
• Simplified issue: Instead of a full medical exam, you’ll complete a health questionnaire covering your medical history and habits. Because the insurer has less data to assess risk, premiums are typically higher than with fully underwritten policies.
• Guaranteed issue: No medical questions or exams are required. However, if you’re in good health, you’ll likely pay more for this type of policy than for one that factors in your health.

How To Get the Right Type of Life Insurance

Once you’ve determined the type of life insurance that fits your needs and long-term financial goals, the next step is comparing quotes to find the best premium. This is especially important for permanent policies, like whole life insurance, which you may pay for the rest of the insured’s life. Get quotes from three to five different insurers to compare your coverage and premium options.

However, this process can be tedious, as you’ll likely need to go to each insurer individually for a quote. Speed up this process by using an insurance marketplace like SmartFinancial. After answering a brief questionnaire, we can connect you with a licensed insurance agent to help you get the type of life insurance you need. Click here for a free life insurance quote today!