3 Types of Life Insurance: Which Kind Do You Need?

Thinking about life insurance? Here are the different types available and how they work.

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Updated May 13, 2024
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Life insurance can provide financial assistance to loved ones in the event of your death. And although it can be unpleasant to discuss, it’s something that many adults in the U.S. think about.

In 2018, half of all U.S. adults visited a life insurance company website or tried to learn more about life insurance online. Almost one-third of those individuals then purchased or attempted to purchase a life insurance policy online.

If you’re thinking about buying life insurance, we’re here to help answer your life insurance questions so you can better understand how life insurance works. Below, we’ll explain the different types of life insurance, how they work, and which one could be a good fit for you.

In this article

The 3 types of life insurance coverage

There are three primary types of coverage available from most life insurance companies: term, whole, and universal. Each one has its own unique terms and types of cost, so we’ll compare them and explain how they all work.

Term life insurance

Term coverage is straightforward and easy to understand. You pay a certain premium on a monthly or yearly basis for a set number of years, known as a term. If you die within the term, a death benefit will be paid out to the person you chose as a beneficiary. The payout is typically a tax-free lump sum with a limit determined by how much coverage you initially signed up for.

If you die outside the set term, there is no death benefit payout. Terms can last for any number of years, but common offers will be for one year, five years, 30 years, or more.

Your life insurance beneficiary is the person you choose to receive your policy’s benefits when you die. In the case of multiple beneficiaries, you can decide how the benefits are distributed between them. Possible beneficiaries may include:

  • One person, such as your spouse or business partner
  • Two or more people, such as your children or other family members
  • An organization, such as a charity or nonprofit
  • A trust
  • Your estate

Overall, term life insurance is a simple type of coverage that works for a lot of people. You get to choose how much coverage you want and for how long it will last. Because the coverage isn’t permanent, it’s typically less expensive than other types of life insurance. Even if the term ends, you can usually continue on the same policy if you want to.

Still, there are some possible downsides to term life insurance. Because it’s not permanent, it won’t work for someone who wants a policy that will last their entire life. Yes, it’s possible to continue the same policy, but you can expect your premiums to rise significantly once your term ends. And, depending on your type of coverage, your premiums may rise each year anyway.

With level term life insurance, your premiums stay the same throughout the duration of the term. With renewable term life insurance, your premiums can increase each year or every five years. This is to account for your increasing age and the likelihood that your health is declining in turn, which would increase the risk for the insurance company.

For the most part, term life insurance is a good choice for many people considering life insurance coverage. This may include a parent of young children who mainly wants a safety net in place until their kids are out of college and self-sufficient, or the business partner at a startup who’s concerned about the well-being of their company as it’s just beginning to grow.

In such cases, it would be important for these individuals to have life insurance policies that last a certain period of time for specific reasons — namely making sure their family is taken care of or their business is protected.

Whole life insurance

Whole life insurance is the typical counterpart to term life coverage. Instead of lasting a certain amount of time, whole life insurance lasts your entire life. In some cases, because of this distinction, it is called permanent life insurance. Because there’s no set term, any death benefit associated with a whole life policy will come into play whenever the policyholder dies.

With traditional whole life coverage, the premium is designed to be charged at a level rate throughout the duration of the policy. For many, this takes some stress out of the equation because you don’t have to worry about changing premiums.

Often, many whole life policies include a cash value amount that accrues as you pay premiums. A part of your premium will go toward this amount and you can then borrow against the cash value or have it invested, depending on your policy.

One of the main reasons people are interested in this type of coverage is because it’s permanent. They pay their premiums, and they generally don’t have to worry about any change in their monthly premiums or death benefit.

Because this is permanent coverage, it typically costs more than term life insurance. And if you borrow money from your attached cash account, your death benefit could be adversely affected. Also, if you invest money from your cash account, you take the risk of losing money over time.

Whether a whole life policy makes sense for you depends on your situation. If you take out a whole life policy when you’re younger, you could lock in a good deal when you’re relatively healthy. Also, your policy’s cash account can grow throughout your life and provide you with a lot of value later on. If you’re older, it might not make as much sense to have whole life coverage. It could take decades for the cash value to grow, so it likely wouldn’t be worth it.

Universal life insurance

Universal life insurance is also a form of permanent coverage and can be similar to traditional whole life insurance, though it is typically more flexible. Like whole life insurance, universal life insurance also offers a cash value component. The difference is, you can also alter your premiums if you have enough cash value to cover the costs.

Premiums are generally less expensive for universal life policies compared to whole life coverage. However, because it’s permanent coverage, universal life typically comes with more expensive premiums than term life coverage. Premiums are typically paid in one of three ways:

  • Flexible: You can alter your premiums during the course of your policy’s lifetime. If you have a cash value account, you can use money from it to lower your premiums.
  • Fixed: Your premiums are fixed for the duration of your policy.
  • Single: You make a single premium payment and never have to pay a premium again on this policy. Because it’s only one premium, you can expect it to be much higher than normal.

Your premiums are the guarantee of life insurance coverage. If you miss a premium payment, your policy may lapse and you’ll lose your coverage. It depends on your insurer, but it’s possible to have a grace period to make up a missed payment before any lapse in coverage occurs.

Universal life insurance would likely appeal to people who like whole life insurance. You’re covered for life, so there’s no stress about your policy running out unless you miss a payment. With this coverage, though, you get more flexibility. Your premiums can be altered and, in some cases, your death benefit can be altered as well. If you’re worried about paying fixed premiums for a long time or want to increase your death benefit later on, you might consider universal life coverage.

FAQs about life insurance

Which is better: term or whole life insurance?

It depends on your situation, though term life insurance is generally more popular. It’s less expensive than whole life insurance and can still last for a very long time. If you don’t want to stress about your policy ending, whole life insurance will be more expensive, but it will provide coverage for life.

What’s the difference between whole life insurance and universal life insurance?

Both whole life insurance and universal life insurance are considered permanent life insurance, so they each provide coverage for your entire life. The difference falls in the flexibility within each policy. With whole life insurance, your premiums and death benefit are typically fixed and cannot be changed. With universal life insurance, they can both be altered.

What’s the best type of life insurance coverage?

The best type of life insurance coverage for you depends on your situation. For a less expensive policy that lasts a certain number of years, you might consider term life insurance. For a slightly more expensive policy that will last your entire life and come with possible investment opportunities attached, you might consider whole life insurance.

What is covered by life insurance?

For the types of death life insurance can cover, most types of death are covered. This can include natural causes, accidental death, suicide, and murder. Certain policies may have specific limitations in place concerning different types of death, so it’s best practice to read over the terms of your policy carefully.

Life insurance can cover many different types of expenses. Because many life insurance death benefits are paid out in a lump-sum, it’s up to the beneficiary to decide how to use the money. It could go toward funeral and burial expenses, mortgage, car payments, and/or other bills. It could also go toward college expenses or replacing the income of the deceased.

What is not covered by life insurance?

Many life insurance policies will not pay out if the policyholder dies while engaged in illegal or dangerous activities. Your claim can also be denied if your policy is expired or something was misrepresented on your original life insurance application. To fully understand what your life insurance policy doesn’t cover, look over the terms of your coverage.

The final word on life insurance

So is life insurance worth it? Each type of life insurance coverage can offer valuable protection and benefits, but the right one for you and how much life insurance you need will depend on your situation.

If you’re looking for a less expensive option so you can choose how long your coverage will last, term life insurance could be a great choice. For permanent policies that cover you for life, you might consider whole life insurance or universal life insurance.

As you’re researching the best life insurance companies, be sure to compare quotes from different providers by visiting an online marketplace. They’re easy to use and can help you save money on your coverage. Even better, there are different ones available for all types of insurance coverage.

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Author Details

Ben Walker, CEPF, CFEI®

Ben Walker, CEPF, CFEI®, is credit cards specialist. For over a decade, he's leveraged credit card points and miles to travel the world. His expertise extends to other areas of personal finance — including loans, insurance, investing, and real estate — and you can find his insights on The Washington Post, Debt.com, Yahoo! Finance, and Fox Business.