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The 5 Different Types of Life Insurance Policies Explained

Thursday, May 18, 2023

You should consider getting life insurance if you have: any financial liabilities, are responsible for taking care of someone else, are a new parent, or are self-employed. It can be an important financial tool that provides both financial security and some peace of mind to loved ones in the unfortunate event of your death. In this article, we will consider the different features, benefits, and drawbacks of the five common life insurance policy types:

  1. Term Life Insurance
  2. Whole Life Insurance
  3. Universal Life Insurance
  4. Variable Life Insurance
  5. Final Expense Insurance
A calculator, a pair of glasses, and a pen sit atop a paper reading "Life Insurance Policy."

1. Term Life Insurance

Term life insurance is the simplest and most affordable form of life insurance. Usually costing less than $100 a month, it provides coverage for a specific term ranging anywhere from one to 30 years, depending on your needs. If you die during the term of your policy, your beneficiaries receive a death benefit payout. Alternatively, if the policy expires before your death, there is no payout.

Term life insurance may be the best option for people who have financial liabilities now, but plan to not have those same liabilities in the future. For example, if you take out a 30-year mortgage on your home, you may select a 30-year term life insurance policy to make sure your loved ones can afford the mortgage if you pass away. It is a good choice for young families and stay-at-home parents.

Advantages of Term Life Insurance:

  • Low premiums: Term life insurance offers the lowest premiums, making it more affordable than other types of life insurance. Premiums are locked in, so they will not go up with age. However, your age does affect your initial rate, so purchase when you are young to decrease the rate.

  • Flexibility: Term life insurance allows you to select the coverage amount and term (or length of time) that aligns with your specific needs.

Disadvantages of Term Life Insurance:

  • No cash value: Term life insurance does not have or build cash value over time, and there is no investment component, so you cannot draw money from the policy.

  • Limited coverage duration: At the end of term life insurance, the coverage ends, and there is no payout. 

2. Whole Life Insurance

Whole life insurance provides lifelong coverage and, unlike term life insurance, includes both a death benefit and a cash value component. Premiums for whole life insurance policies are typically higher than term life insurance, but they usually remain at the same price throughout your lifetime with the policy. 

This type of policy is best suited for people who have long-term financial obligations and can afford it.

Advantages of Whole Life Insurance:

  • Lifetime coverage: Whole life insurance guarantees coverage until death as long as premiums are paid.

  • Cash value growth: A portion of the premiums paid accumulates as cash value over time, which can be accessed through policy loans or withdrawals.
Disadvantages of Whole Life Insurance:

  • Higher premiums: Whole life insurance policies have higher premiums compared to term life insurance.

  • Limited investment returns: While the policy does build investment value, the cash value growth of whole life insurance policies is usually lower compared to other investment options.

3. Universal Life Insurance

Universal life insurance is a flexible permanent life insurance policy that, like a whole life policy, combines a death benefit with a cash value component. It allows you to adjust your premiums and death benefit amount over time, which gives you greater flexibility. 

This type of insurance can be a good fit for individuals with financial needs that change regularly, such as those with variable income, estate planning requirements, or long-term financial goals.

Advantages of Universal Life Insurance:

  • Flexible premiums: As a policyholder, you can adjust the premium payments and coverage amounts to adapt to your financial situation as it changes.

  • Cash value growth: Universal life insurance policies offer potential cash value growth based on the underlying investment performance.
Disadvantages of Universal Life Insurance:

  • Interest rate risk: The cash value growth is subject to fluctuations in interest rates, which can impact the policy’s performance.

  • Potential premium increases: If the policy’s cash value does not accumulate as expected, you may need to increase your premium payments to maintain coverage.
A person surrounded by bills uses a calculator to budget.

4. Variable Life Insurance

What are the three main types of life insurance? Term, whole life, and universal. However, if you are comfortable with investments and would like the possibility of greater returns, variable life insurance may be the type of insurance for you. 

Like whole life and universal, it is a type of permanent life insurance. Variable life insurance, however, allows you to invest your premiums in various investment options like stocks, bonds, and mutual funds. The cash value and death benefit of the policy can fluctuate based on the performance of these investments.

This type of policy is best for individuals who are able to take more significant financial risks and understand investments and the market.

Advantages of Variable Life Insurance: 

  • Tax advantages: The growth of the cash value in a variable life insurance policy is  tax-deferred. This means you will only be subject to federal income tax when you withdraw money from your policy.

  • Flexibility: Variable life insurance policies often offer a range of investment options to suit your risk comfort level. 
Disadvantages of Variable Life Insurance:

  • Investment risk: Fluctuations in the cash value and death benefit can occur based on the performance of the policy’s investments. Poor investment performance can result in reduced coverage.

  • Complexity and fees: Variable life insurance policies can be complex to navigate, and there are often fees associated with the investment options.

5. Final Expense Insurance

Final expense insurance, also known as burial insurance or funeral insurance, is a type of life insurance policy designed to cover the costs associated with a person’s funeral and other end-of-life expenses. These policies generally have lower death benefit amounts and are easier to qualify for compared to other types of life insurance. 

This type of insurance may be suitable for older individuals or for those with health issues who may struggle to qualify for other types of insurance. 

Advantages of Final Expense Insurance:

  • Simplified underwriting: Final expense insurance is usually easier to obtain than other types of insurance, even for people with health issues.

  • Affordable premiums: The death benefit amounts are smaller than other life insurance types, which usually results in more affordable premiums. You can expect to spend between $30 and $70 a month for final expense insurance based on several factors.
Disadvantages of Final Expense Insurance:

  • Lower death benefit amounts: Final expense insurance policies are intended to cover funeral costs – not provide sufficient coverage for larger financial obligations or dependents’ long-term needs. Because of this, the death benefit is usually lower.

  • Limited use of funds: The death benefit is intended to cover end-of-life expenses, including funeral arrangements and any legal or medical expenses that need to be settled by your beneficiary. Outside of this, your beneficiaries have limited flexibility in how the funds can be used.
An older couple stands on a beach embracing.

Choosing the Best Insurance for Your Situation

To determine the best insurance for your situation, take your present and future financial goals into consideration. Determine how much you can afford and how much you are willing to risk, as well as your age and health. If you are unsure of how to proceed, you should consult a trusted insurance agent or financial advisor to determine what type of policy best fits your needs. 

Other Important Things to Know When Choosing a Plan

When possible, choose an independent insurance agent to help you find the right policy. Unlike agents who work for single companies, we are able to shop around to several different insurance providers to find the best deal for you. We can help you compare quotes, read and understand your policy, and look at various riders and options to tailor your life insurance to your specific situation. 

If you’re ready to talk about life insurance, give us a call at Independent Insurance Associates or get a free quote online. We understand the complexities of life insurance, so you don’t have to!