What are the 3 main types of life insurance

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If you’re in the market for life insurance, you’ll quickly discover that there are many options. Choice is a good thing, but it does mean that you’ll have to understand the options before you decide on the type of life insurance that best fits your needs.

Different Types of Life Insurance

When you start looking for life insurance, you’ll face two main decisions right away: What type of life insurance is best for me? And how much life insurance do I need?

As you get life insurance options and quotes, you’ll likely navigate toward a type and coverage amount that’s in line with how much you want to pay.

To get you started on your search, here’s an overview of types of life insurance and the main points to know for each.

• Term life insurance
• Whole life insurance
• Universal life insurance
• Variable life insurance
• Burial insurance/funeral insurance
• Survivorship life insurance/joint life insurance
• Mortgage life insurance
• Credit life insurance
• Supplemental insurance

Compare Different Types of Life Insurance

Here’s a look at multiple types of life insurance to help you find the right policy.

Term Life Insurance

The basics:

• Policy length: Common level term periods include 5, 10, 15, 20 or 30 years
• Cash value: No
• Premiums: Level, annual renewable or decreasing
• Death benefit: Fixed

How it works: Term life insurance has a specific end date for the level term period, when rates stay the same. After this period you can renew the policy, but at higher rates each year. Choices of coverage lengths are generally 5, 10, 15, 25 or 30 years. It’s the cheapest way to buy life insurance because you’re buying only insurance coverage and not paying for cash value life insurance.

Who is it for: Term life insurance is ideal for people who want life insurance coverage for a specific debt or situation. For example, some people buy it to cover their working years as income replacement for their family in case they pass away. Some people buy term life to cover the years of a mortgage or other large debt.

Downside: If you still need coverage after the level term period expires, you could find the renewal rates to be unaffordable. And buying a new life insurance policy could be extremely pricey based on your age and any health conditions you’ve developed.

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Term lengths available

10, 15, 20, 25 or 30 years

Whole Life Insurance

The basics:

• Policy length: Permanent
  
• Cash value: Yes
  
• Premiums: Level
  
• Death benefit: Fixed

How it works: Whole life insurance can provide coverage for the duration of your life. An account within the policy builds cash value over time by using part of your premium payment and adding interest. A policy will have built-in guarantees that the premium will not increase, the death benefit remains the same, and the cash value will earn a fixed rate of return.

Who is it for: Whole life is suited for people who want lifelong coverage and are willing to pay for the guarantees provided by the policy.

Downside: Because of the guaranteed features, whole life insurance is one of the more expensive ways to buy life insurance.

Universal Life Insurance

The basics:

• Policy length: Permanent
  
• Cash value: Yes
  
• Premiums: Might be flexible
  
• Death benefit: Might be flexible

How it works: Universal life insurance (UL) can be hard to understand because there are a few varieties and with very different features. Universal life insurance can be cheaper than whole life insurance because it generally doesn’t offer the same guarantees.

With some forms of universal life you can vary premium payments amounts and rejigger the death benefit amount, within certain limits. UL policies often have a cash value component.

Who is it for: Universal life insurance can be good for someone looking for lifelong coverage. Some varieties of UL are suited for people who want to tie their cash value gains to market performance (indexed and variable universal life insurance).

Downsides: If cash value is your main interest, not all UL policies guarantee you’ll make gains. And if you’re interested in flexible premiums payments, you have to stay on top of your policy’s status to make sure that the policy’s fees and charges don’t deplete your cash value and cause it to lapse. Understand what’s guaranteed within a UL policy and what isn’t.

Variable Life Insurance

The basics:

• Policy length: Permanent
  
• Cash value: Yes
  
• Premiums: Level
  
• Death benefit: Might fluctuate

How it works: Variable life insurance offers permanent coverage and cash value. The policyholder chooses the sub-accounts in which to invest and those decisions determine how much the cash value account grows. You can also lose money based on the performance of your sub-accounts.

Who is it for: People who want lifelong coverage and who seek to take an active role in their life insurance investments. Those with variable life insurance also shouldn’t mind taking on risk.

Downsides: You can lose money on your death benefit and cash value if you choose the wrong investments.

Burial and Funeral Insurance

The basics:

• Policy length: Permanent
  
• Cash value: Yes, typically
  
• Premiums: Level
  
• Death benefit: Fixed

How it works: You may see this kind of policy called burial, funeral or final expense insurance. No matter the name, it’s usually a small whole life insurance policy that’s intended to pay only for funeral costs and other final expenses. Burial insurance is often offered as a policy that you can’t be turned down for and that doesn’t require a medical exam.

Who is it for: These types of policies are generally for people in poor health who don’t have other life insurance options and who need insurance for funeral expenses.

Downsides: Burial insurance policies are expensive, based on the amount of coverage you get for your money.

Burial insurance policies also have a safeguard for the life insurance company: Your beneficiaries won’t get the full death benefit if you pass away within two or three years after buying the policy. Check the policy’s timeline for these “graded death benefits.” Your beneficiaries might receive only a refund of the premiums you paid in, plus some interest.

Survivorship Life Insurance

The basics:

• Policy length: Permanent, typically
  
• Cash value: Yes, typically
  
• Premiums: Varies
  
• Death benefit: Paid out after the second person dies

How it works: These joint life insurance policies ensure two people under one policy, such as a husband and wife. The payout to beneficiaries is made when both have passed away. You may see them called second-to-die life insurance, but for understandable reasons the industry is moving away from this name.

Survivorship life insurance can be less expensive than buying two separate life insurance policies, especially if one of the people has health issues.

Who is it for: Survivorship policies can be beneficial in estate planning when the life insurance money is not needed by a beneficiary until both of the insured people have passed away. Survivorship life insurance might be used to fund a trust, for example. It’s also suited for high net worth couples who want to provide money to heirs for estate taxes. Or it could be used by a couple to provide a donation to charity.

Downside: If two spouses are insured and one would suffer financially if the other passed away, this is not the right policy type. The surviving spouse does not receive any life insurance benefits. The payout is only made when both have passed away.

Mortgage Life Insurance

The basics:

• Policy length: Life of the mortgage
  
• Cash value: No
  
• Premiums: May fluctuate
  
• Death benefit: Declining death benefit as you pay down mortgage

How it works: Mortgage life insurance is designed to cover only the balance of a mortgage and nothing else. This policy type is different from the life insurance types above in two major ways. First, the death benefit is paid to the mortgage lender, not a beneficiary that you choose. Second, the payout is the balance of the mortgage, or partial balance if that’s what you insured.

Who is it for: Mortgage life insurance is intended for people who are primarily concerned about their family being burdened by the mortgage if they passed away. It can also be appealing to someone who doesn’t want to take a medical exam to get life insurance.

Downside: This type of policy won’t provide financial flexibility for your family.

If you’re looking for life insurance to cover a mortgage or other debts, you’re better off with term life insurance. You can choose the term length and amount, and provide more than just mortgage money to your family. Your family can use a payout for any purpose. They may decide to use the money elsewhere.

Credit Life Insurance

The basics:

• Policy length: Permanent, typically
  
• Cash value: No
  
• Premiums: Level
  
• Death benefit: Pays off remaining debt to the lender

How it works: Like mortgage life insurance, this insurance covers a specific debt. When you take out a loan you might be offered credit life insurance. The payments can usually be rolled into your loan payments. The life insurance payout is the balance of the debt and it’s paid to the lender, not your family.

Who is it for: If you’re concerned about how your family would pay a certain debt if you passed away, credit life insurance might look appealing and convenient. It can also be attractive because there’s no medical exam required to qualify.

Downside: Credit life insurance is very narrow and doesn’t allow financial flexibility in the future. You’re probably better off with term life insurance, which you can use to cover many concerns, from debt to income replacement to funeral expenses. A broader policy like term life will give your family more financial options if you pass away.

Supplemental Life Insurance

The basics:

• Policy length: Connected to your employment
  
• Cash value: No
  
• Premiums: Low or no cost
  
• Death benefit: Fixed

How it works: The life insurance you may have through work is supplemental life insurance, also known as group life insurance. It sets rates based on the group, not the individual.

Who is it for: Because usually it’s free or inexpensive, group life insurance is a good value. It’s good as supplementary coverage to your own individual life insurance policy.

Downside: If you lose the job you generally lose the life insurance, too. That’s why it’s best to have your own life insurance that’s not tied to the workplace. Plus, on your own you can buy higher amounts of insurance.

What’s the Best Type of Life Insurance?

The type of life insurance that’s best for you depends on why you need coverage. Someone who wants to make sure their loved ones have money to pay for a funeral requires much different life coverage than a person who needs it to pay off a $300,000 mortgage.

Here’s a look at the best life insurance based on your needs.

Types of Life Insurance By Underwriting Method

Insurance companies often conduct an underwriting process to gauge a person’s health and risk. That process results in whether an insurance company insures the applicant and how much to charge for premiums.

Here are the different types of life insurance underwriting:

Fully underwritten

• Medical exam required
• Lengthy application process with multiple questions related to health, family history. lifestyle and hobbies
• Cheapest policies since life insurance company does its due diligence to check on the person’s insurability

Guaranteed issue

• Doesn’t require a medical exam
• No health questions asked
• Often the most expensive policies

Simplified issue

• Doesn’t require a medical exam
• Applicants must answer a handful of health-related questions and a “yes” answer could result in denial
• Insurance company usually uses algorithms that leads to quick approval decision

Compare Life Insurance Companies

Compare Policies With 8 Leading Insurers

Frequently Asked Questions

What is the most popular type of life insurance?

Whole life and universal life each comprise about one-third of market share by life insurance premiums, according to the latest LIMRA figures. Term life is next with 20% and variable universal is at 13%.

However, universal life has become a much more popular offering over the past year. The number of universal policies increased 69% from third quarter 2020 to third quarter 2021. Meanwhile, the number of whole life policies increased by only 1% and term life decreased by 7%.

Overall, the number of life insurance policies increased by 5% between third quarter 2020 and third quarter 2021.

Which type of life insurance is also an investment?

Permanent life insurance policies, such as whole life, universal life and variable life, have an investment portion called cash value.

Cash value builds over time and allows policyholders to tap into the policy while the person is alive. The investment options that help build cash value vary by the type of policy.

What type of life insurance can you borrow from?

You can borrow from permanent life insurance policies, including whole life, universal life and variable life. Borrowing isn’t available with term life insurance policies.

What are the two major types of life insurance?

The two major types of life insurance are term life insurance and permanent life insurance.

Term life insurance allows you to lock in rates for a specific period of time, such as 5, 10, 15, 20 or 30 years. Premiums can be level, annual, renewable or decreasing, depending on the policy you choose.

Term life insurance has a fixed death benefit, but it does not have cash value.

Permanent life insurance is coverage that typically lasts for your entire life and can build cash value. There are several types of permanent life insurance, including whole life, universal life, and variable life insurance.

Permanent life insurance death benefits, premiums and cash value growth varies based on the type of policy you purchase.

What is the most common type of life insurance?

What are the 2 major types of life insurance?