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MATTHEW COLLISTER
Choosing a death benefit is just one of the decisions you must make when buying life insurance. In fact,
there are a number of policy types to choose from, each with different features. A key feature to
understand is the policy’s length. A policy can either be in force for a set term or be permanent and
remain in force until the end of your life. Permanent life policies also typically have a savings feature
known as “cash value.”
Sorting through these and other options can take some time. The good news is that having these options
means you can get a policy closely aligned with your (and your family's) needs.
Let’s take a closer look at six key different types of life insurance.
Term
No
Level
Fixed
Whole
Permanent
Yes
Level
Fixed
Universal
Permanent
Yes
Level or flexible
Flexible
Variable
Permanent
Yes
Level
Fixed
Burial
Permanent
Yes
Level
Fixed
Mortgage
No
May be flexible
A term life insurance policy lasts for a set period—usually 10, 20, or 30 years. You choose the length of
the term when you buy the policy. When the term ends, the policy expires. However, some insurance
companies provide an option to renew coverage from year to year after the end of the term.
Unlike many other types of life insurance, term life has no cash value component—it’s simply insurance.
Because of this, term life insurance is typically much simpler and cheaper than other types of coverage.
Term life pros
Term life insurance is a good option if you need life insurance for a set term (for example, until children
have reached adulthood) and aren’t interested in a cash value feature.
Whole life is permanent insurance, meaning a policy stays in effect until your death, provided you pay
the policy’s premium. Whole life also has a cash-value feature, with earnings at a modest, though
guaranteed, rate. You can access this money through a loan or withdrawal, though it may take several
years to build up enough cash value to do so.
Because of these features, whole life policies tend to be significantly more expensive than term life
policies.
Other forms of cash value insurance have more aggressive cash-value growth.
Whole life can be a good fit if you need permanent insurance that will never expire and are interested in
cash value with guaranteed returns.
Universal life
Universal life is another type of permanent, cash-value insurance. But unlike whole life, universal life
offers a bit of flexibility. Importantly, you can adjust the death benefit and premium as your needs
change. Universal life also has a cash-value component that grows based on market performance. That
growth is not guaranteed, however.
A universal life policy may be a good choice if you need permanent insurance that will never expire and
have greater risk tolerance when it comes to cash value.
Variable life
Variable life is permanent life insurance with cash value. These policies allow the most control over the
cash-value investment: You can pick and choose from a portfolio of bonds or mutual funds in which to
invest your cash-value funds. These policies carry a greater degree of investment risk and reward than
whole or universal life. You may decide to enlist the help of a financial advisor to manage your cash-
value investment portfolio.
May need assistance from a financial advisor to manage the policy investments.
If you need permanent insurance that will never expire and have the resources to manage the policy's
investment portfolio, variable life may be right for you.
Burial life insurance policies are marketed to seniors or those in poor health as a way to help family
members pay for a funeral and associated costs. These are typically whole life insurance policies with a
limited death benefit (for example, no more than $25,000). They're also "guaranteed issue," meaning
there’s no medical exam, and the policy is issued without extensive underwriting. This makes these
policies easier to buy than other life insurance types.
While these policies may have a cash-value component, they’re typically not purchased as an
investment tool. Such policies are rarely in force long enough to build much cash value.
Policy may not be in force long enough to build significant cash value.
If you’re a senior or have serious health issues and want to be sure your dependents can cover your
funeral costs, burial life can be a good fit.
A variation of a term life policy, a mortgage life insurance policy ensures your family isn’t saddled with a
mortgage payment after your death.
The term and death benefit of a mortgage life insurance policy are tied to the term and balance of the
mortgage. As the mortgage balance is paid down, the policy’s death benefit decreases correspondingly.
The policy premium may decrease as well. As with any other term life insurance policy, a mortgage life
insurance policy has no cash-value component.
The death benefit may be payable directly to the mortgage lender. This ensures the policy fulfills its
intended purpose. However, it does remove the flexibility inherent in a typical death benefit payment,
which can be put to numerous purposes by your beneficiaries.
Mortgage life insurance pros
No cash value.
Choose mortgage life insurance if you don’t want loved ones to have mortgage payments after your
death and don’t need the flexibility of having a death benefit paid directly to your family members.
The six life insurance types outlined above just scratch the surface of your options. Here are a few more
to consider:
Group life insurance is coverage provided by an employer as an employee benefit. Because the
premiums are calculated based on the group (all employees) rather than the individual, policies are
usually very inexpensive. However, the amount of coverage may not be enough to provide substantial
financial security to your family. And it may end when you leave your job.
Supplemental life insurance is intended to complement and round out employer-provided group
coverage. A policy may be available through your employer or purchased on the open market.
Credit life pays off the balance of a home equity line of credit or other personal loan in the event of your
death. It may be offered by your lender when you take out the loan.
A survivorship policy insures two people, such as a married couple. The death benefit is paid only after
both policyholders pass away.
When shopping for life insurance, it's helpful to understand the types of underwriting used by insurance
companies.
Underwriting is the process insurers use to determine the likelihood you'll file a claim within a certain
period. This likelihood drives the cost of the policy. It may also help the insurer determine other details,
such as how quickly to put coverage into effect.
Traditional underwriting
Traditional life insurance underwriting involves a medical exam, an extensive medical history screening,
and even a review of your hobbies and lifestyle. All of this helps the insurer determine your life
expectancy.
Accelerated underwriting
With accelerated underwriting, an insurer typically forgoes a medical exam and leans more heavily on
your answers to a health questionnaire and a review of your medical records. The insurer may also look
at third-party information, such as your prescription history. If the insurer’s review of these records
results in any concerns, it may require you to take a medical exam. A policy with accelerated
underwriting may cost a bit more than one that’s traditionally underwritten.
Guaranteed issue
As the label implies, guaranteed issue life insurance underwriting ensures you’ll be able to get coverage.
There’s no medical exam or questionnaire to complete. Guaranteed issue policies are usually marketed
to older adults and provide only a limited death benefit.
Simplified issue
A simplified issue policy does not require a medical exam. However, the insurer will require you to
complete a health questionnaire and may review third-party medical records. Coverage can be denied
based on the questionnaire and records.
More than 700 companies sell life insurance in the U.S. Here are a some of our recommendations:
Ethos Life
Term, whole
Term
Ladder Life
Term
An independent insurance agent or financial advisor specializing in life insurance can help you sort
through your choices and get the right policy. You can also consider an online broker such as Everyday
Life, which offers whole and term life insurance from several companies.
TIME Stamp: When it comes to life insurance, you have many options
All life insurance policies pay a death benefit. However, that’s where the similarity stops. Each type
offers specific features that may make sense based on your needs. An insurance agent or financial
advisor can help you understand your options.
Frequently asked questions (FAQs)
According to the American Council of Life Insurers, approximately 41% of life insurance policies sold are
term life. Permanent life insurance makes up the remaining 59%, though that percentage is split by
multiple policy types (for example, whole, universal, and variable).
Term life policies have a set term of typically 10, 20, or 30 years. When the term ends, the policy expires.
These policies have no cash value feature—they’re insurance, plain and simple.
Whole life policies are permanent, meaning they stay in force until death. These policies have a cash
value component, which earns money at a guaranteed, though modest, rate. You can access the policy's
cash value through a loan or withdrawal. Because of these features, whole life policies are usually much
more expensive.
Any permanent life insurance policy has a savings and investment component called cash value. Cash
value earns money over time; how it earns depends on the specific policy type. A whole life policy, for
example, earns a guaranteed but modest return. A variable life policy, on the other hand, has earnings
(not guaranteed) based on the performance of an investment portfolio. Note that if you don’t use up the
cash value—to help pay premiums, fund your retirement, or in other ways—before your death, what’s
left stays with the insurance company; it does not go to your beneficiaries.
The information presented here is created independently from the TIME editorial staff. To learn more,
see our About page.
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