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Life insurance is a critical component of a family’s financial strategy, so it’s vital to select the right type of coverage. There are several options available, though, making it challenging to determine which is ideal for you. Most life insurance is categorized as a term policy or permanent policy. In this guide, Bankrate’s insurance editorial team breaks down life insurance to help you decide which type is best for you and your loved ones.
- There are two main types of life insurance: term and permanent.
- Term life insurance is typically more affordable than permanent life insurance because it is only active within a set period.
- Permanent life insurance policies have cash value accounts, where some of your premium is set aside and grows over time.
- Life insurance companies calculate rates based on the mortality risk of each policyholder, so taking steps to live a healthier, safer lifestyle could help you qualify for cheaper life insurance.
Different types of life insurance
There are two main types of life insurance available: term and permanent. Once you understand these types, the nuances of more specialized policies become easier to digest. Below, we explain term life and permanent life insurance and review some of the more specialized product types within each category.
Term life insurance
Term life insurance is typically more affordable than permanent life insurance because it is only active within a set period. Some kinds of term life insurance also maintain constant premiums throughout the policy’s life.
The four primary types of term life insurance are:
- Level term policies
- Yearly renewable term policies
- Decreasing term
- Return of premium policies
Level term policies
A level term policy covers the policyholder for a set period of time. Additionally, the death benefit — the amount your beneficiaries are entitled to — remains at a fixed level for the entire term. If you hear the phrase “term life insurance,” it’s probably referring to a level term life insurance policy.
Yearly renewable term policies
Yearly renewable term policies have no specified term limit and renew annually. However, your premium could change each time you renew. It depends on your new age at the time of renewal — the policy is likely to get more expensive as you get older. Additionally, not all companies offer yearly term policies. It’s much more common to see policies with terms of five, 10, 15, 20 and 30 years.
Decreasing term policies are unique in that the death benefit decreases in increments, usually year by year. Decreasing term policies may be attractive to policyholders with children. As their children age and get closer to financial independence, the policyholder may not need as high of a death benefit. Decreasing term insurance can also be a good option for those who only want coverage as they pay down debt. As each year passes and more debt is paid off, the death benefit decreases to only cover the insured for the amount of debt they would leave behind should they pass away.
Return of premium policies
Return of premium policies are a useful feature that can be added to several types of term life insurance. While not actually a specific policy type, adding a return of premium life insurance rider means that, if you have not passed away when the policy term expires, you will receive back all the premium you paid into the policy. That said, a return of premium endorsement usually increases the cost of life insurance.
Learn more: Best term life insurance companies
Permanent life insurance
Permanent life insurance is designed to cover you for your entire life, as long as the premiums are paid. Because of this, permanent life insurance is usually more expensive than term coverage, but it also provides some additional perks. One of those perks is cash value.
Permanent life insurance policies have cash value accounts, where some of your premium is set aside and grows over time. Depending on the type of policy you choose, growth may occur on a steady basis or it may fluctuate with the market. Cash value usually doesn’t grow quickly, but it can be useful. You could apply it to premium payments, or if you’ve accumulated a large enough balance, borrow against it. Just keep in mind that if you use your cash value and don’t pay it back, generally you will lower the death benefit amount paid to your beneficiary.
There are more types of permanent insurance than there are term policies. The main types of permanent life insurance are:
- Whole life insurance
- Universal life insurance
- Simplified issue insurance
- Guaranteed issue insurance
- Final expense insurance
Whole life insurance
Whole life insurance is the most basic form of permanent life insurance coverage. The premium and death benefit never change with traditional whole life insurance. You’ll be covered as long as you pay your premiums, and your policy will build up cash value (albeit slowly) at a steady rate.
Learn more: Best whole life insurance companies
Universal life insurance
Universal life insurance, sometimes called adjustable life insurance, adds an element of flexibility by allowing policyholders to increase the death benefits and adjust premium payments on their policies. This policy type might be appealing if you value the ability to adjust your policy to your new life insurance needs as you age. Universal life can be divided even further into indexed universal and variable universal life. These policies can become rather complex, so it’s best to talk to a licensed life insurance agent to understand if they are right for you.
Learn more: Best universal life insurance companies
Simplified issue life insurance
Simplified issue isn’t actually a type of life insurance, and it may be offered with various policy types. While many life insurance providers require that policy applicants undergo a medical exam so that the insurer can adequately assess their risk of death, a simplified issue policy allows applicants to skip the exam. Instead, policyholders fill out a health questionnaire and report any habits they have that might increase their likelihood of dying. The drawback to this option is that the premiums tend to be more expensive because there are no medical exams.
Guaranteed issue life insurance
A guaranteed issue life insurance policy allows users to apply without taking a medical exam. A health questionnaire may still be used, but coverage won’t be denied based on the answers. This option is particularly advantageous for elderly applicants or those whose health conditions may make it impossible to get coverage otherwise. Understand, though, that while coverage can’t be denied based on your health, you will likely pay a higher premium for a guaranteed issue policy. Typically these policies are whole life, but it’s possible that some companies offer other types of permanent insurance that are guaranteed issue.
Final expense insurance
A final expense policy is a type of whole life insurance that is designed to cover end-of-life expenses and little else. It may be especially useful for people who don’t want or need to leave financial support to loved ones but who want their funerals and other end-of-life costs to be covered. Coverage limits for final expense insurance are typically lower than many other types of life insurance, and coverage may be comparatively more expensive.
Choosing the right type of life insurance policy
The many types of life insurance available can feel overwhelming. When shopping for a policy, the first critical step is determining the goal for your coverage. Do you want just enough coverage to pay for your funeral expenses? Do you want to leave a financial gift to someone? Might you want to change the coverage amount in the future?
It’s also important to consider how long you’ll need coverage. If you only need the policy for a specific time, term life insurance might be the best option. For those who want the peace of mind of lifelong coverage, permanent insurance is likely the better fit. Working with a financial planner or life insurance agent can be useful to determine the type and amount of life insurance you need.
Term life vs. permanent life insurance: Which is better for me?
Despite the comparatively cheap premiums associated with term life insurance, there are a couple of drawbacks. Permanent insurance policies generally include a cash value account, which accrues money over time and can be used to pay premiums or to take out as a loan. Term life insurance doesn’t have this option.
Another drawback with term life insurance is that it only provides coverage for a set period. If a policyholder buys a 10-year term policy but dies 11 years after purchasing it, no death benefit is paid. If a policyholder outlives the term of their policy, they may have the option of renewing it, converting the policy to a permanent insurance policy — such as whole life insurance — or letting the policy end. You will have to ask your insurance agent which options are available when initially purchasing the policy.
Ultimately, the best policy for you will depend on your unique financial situation. If you’re seeking lifelong coverage that builds cash value, a permanent life insurance policy is likely ideal. But if you’d prefer affordable coverage to meet your short-term needs, a term life insurance policy could be the better option. Experts recommend consulting with a licensed insurance provider to ask questions and explore your options in greater depth before purchasing a policy.
Frequently asked questions
Getting the right amount of life insurance is important to help ensure that your financial needs are covered. Bankrate’s life insurance calculator can offer a starting point to figure out the amount of life insurance that is right for you. It may also be helpful to speak with a licensed insurance expert to help guide you through the process. To determine how much you’ll pay in premiums for the amount of insurance you need, shop around for coverage and compare quotes to identify the best rate available to you.
Term life insurance is one of the most popular types of life insurance. It tends to be more affordable than permanent life insurance, at least for younger individuals (term coverage often is not available past a certain age). Plus, it provides a way to get coverage for only the years you need it. However, the best life insurance for you will depend on your needs.
Life insurance companies calculate rates based on the mortality risk of each policyholder. This means that anything that increases the risk of death will likely increase your premium. Life insurance companies will also generally charge you more for insurance if you engage in risky hobbies like skydiving, bungee jumping or racecar driving. Taking steps to live a healthier, safer lifestyle could help you qualify for coverage through companies offering cheap life insurance.