Types of Life Insurance Plans and How to Decide Which One Is Right for You (2024)

Term Life Insurance

Term life insurance policies offer coverage that is limited to a set period—often 10, 20, or 30 years. You select a term and coverage amount and pay a monthly premium to keep coverage. If you pass away during the term in a way that doesn’t violate the contract, your beneficiary receives the plan’s death benefit. If you outlive the term, your coverage will end unless you opt for a renewal.

Features

• Coverage for a set number of years
• Pays death benefit to the beneficiary if you die during the term
• May have a renewal option

Pros

• Affordable premiums
• Premiums do not increase during the term
• Insurers may allow renewals

Cons

• Doesn’t last for life
• Renewals bring premium increases
• No cash value component

Ideal for:

Term life insurance is typically best for those who need affordable coverage during a period when they have large financial responsibilities. For example, if you’re the breadwinner of your family, you may want coverage while your children are growing up and you’re paying off your mortgage.

Whole Life Insurance (Permanent)

Whole life insurance policies offer coverage for the rest of your life—as long as you pay your premiums. They come with a fixed death benefit and a fixed monthly premium. Both are established when you initially sign up and stay the same as long as you keep the policy active. When you pass away, your death benefit gets paid out to your named beneficiary.

In addition to a fixed death benefit, whole life policies come with a cash value savings component. Every time you make a premium payment, part of the payment goes toward your cash value. Interest then accrues on that money according to a fixed rate.

You can withdraw from or borrow against your cash value account during your life. However, that amount will be deducted from the death benefit your beneficiary receives. You could choose to pay back a cash value loan to return to the original death benefit.

Features

• Permanent policy
• Cash value component, which can be used for loans, withdrawals, or to pay premiums
• Fixed premium and death benefit
• Guaranteed cash value growth

Pros

• Predictable premium payments
• Guaranteed death benefit amount
• Coverage for life
• Can borrow against or withdraw from cash value, or use it to pay premiums

Cons

• Initially, much more expensive than term life
• Cash value may grow slower than with other policies
• No flexibility to adjust the premium or the death benefit

Ideal for:

If you’re looking for a predictable and low-maintenance life insurance policy that’ll cover you for the rest of your life, whole insurance can be a good fit. It helps you leave behind a sizable amount of tax-free money to your loved ones and gives you access to money during your life. On the downside, it does initially come at a much higher cost than term life insurance. But the premiums will not increase as you get older, as they do with other types of insurance, including term insurance renewal.

Universal Life Insurance (Permanent)

Universal life insurance is another permanent policy that’s designed to cover you for the rest of your life, as long as you pay the premiums and don’t deplete your cash value.

Like whole life insurance, it has a cash value savings component. However, unlike whole life, your premium and death benefit won’t be fixed. You can adjust them up or down to better suit your budget throughout your lifetime.

You must pay enough to cover the policy’s underlying insurance cost though, which goes up as you get older. By design, you’re supposed to pay more than the insurance cost to build cash value when you’re younger so that it helps cover the rising insurance costs as you get older. Otherwise, your premiums will go up.

Another difference between whole life and universal life is that interest on the cash value of a whole life policy accrues at a fixed rate, while interest on a universal policy accrues according to market interest rates. As a result, you can earn more when the market is up but can also earn less when the market is down. That said, many insurers have minimum performance guarantees for the cash value interest return.

Features

• Permanent life insurance policy
• Adjustable premiums and death benefit
• Cash value component, which can be used for loans, withdrawals, or to pay premiums
• Cash value interest accrual linked to market interest rates

Pros

• Permanent policy
• Cash value can go toward loans, withdrawals, or premiums
• Flexible premiums and death benefit

Cons

• Requires budgeting to maintain coverage
• Premiums go up if not enough cash value is saved
• Cash value is more exposed to risk

Ideal for:

Universal life insurance can be a good fit for those who want permanent coverage but also want more flexibility when it comes to their monthly payments. It’s also a good fit for those who are comfortable with a bit more risk due to the cash value being linked to market interest rates.

Variable Universal Life Insurance (Permanent)

Variable universal life insurance is another type of permanent life insurance with a cash value savings component. The difference with this policy is that you invest your cash value into assets like mutual funds. As a result, your cash value’s growth will depend on the performance of your investments.

However, many insurers let you allocate part of your premium to a fixed account with a guaranteed rate of return to limit your risk. This type of policy also offers flexibility when it comes to your death benefit and premium amount.

Features

• Permanent policy
• Cash value growth tied to investments
• Flexible premiums and death benefit

Pros

• Permanent policy
• Flexible payments
• Cash value component, which can go toward loans, withdrawals, or premiums
• Investment options can help you grow your cash value faster
• Gives you control over how your cash value is invested
• Part of cash value can have a fixed rate of return

Cons

• Risk of poor cash value growth and even losses
• Investment losses could lead to a reduced death benefit
• More fees and charges than other permanent policies
• More complex than other life insurance types

Ideal for:

A variable universal life insurance policy is going to be best for those who are investment-savvy and want more control over their cash value’s growth. You’ll be the one deciding where to allocate the funds so it’s important to have some investment know-how, along with an understanding of the risk and reward potential at play. It can be a good fit for people who’ve already maxed out their retirement contributions and want to build additional savings for retirement.

Final Expense Life Insurance (Permanent)

Final expense insurance, also known as burial insurance, is designed to cover end-of-life expenses such as a person’s funeral. You don’t normally need to undergo a medical exam to get approved, unless you have a serious pre-existing medical condition. Insurers may offer guaranteed acceptance for people in a certain age group. For example, Mutual of Omaha guarantees acceptance for applicants between the ages of 45 and 85.

In exchange for having no medical exam, final expense insurance charges higher premiums versus policies that do require a medical exam. Final expense policies also have low maximum coverage amounts. This is what keeps monthly premium payments relatively low, but they’re likely to be even lower if you can get a small whole life policy that requires a medical exam.

Features

• Permanent coverage
• No medical exam is required in most cases
• Lower coverage amounts
• Higher premiums for the amount of coverage offered
• Some offer guaranteed acceptance for age groups
• Cash value component, which you can borrow or withdraw against, or use to pay premiums

Pros

• Low coverage amounts keep monthly payments relatively affordable
• Sometimes guaranteed for elderly age groups
• No medical exam is required in many cases
• Permanent coverage
• Cash value component can go toward loans, withdrawals, or premiums

Cons

• Lower maximum coverage amounts
• Higher premiums than policies that require medical exams
• May not be available over a certain age (e.g. 85)
• Medical exams may be required for severe health conditions

Ideal for:

Final expense insurance is often a good choice for people who find other insurance policies inaccessible. It can provide a way to get coverage for your funeral, burial, and final bills if you’re getting toward the end of life and don’t have other resources to cover those expenses.

Other Types of Life Insurance

In addition to the main types of life insurance, here are a few other variations you may come across when shopping around.

Short-Term Life Insurance

Short-term life insurance provides coverage for a very short period, such as one year. It’s designed for those who want loved ones to receive a death benefit if they pass in the near future. For example, Progressive offers one-year policies up to $200,000 that don’t require a medical exam. You might want that kind of policy to fill a temporary gap, such as if you’re in between jobs.

Variable Life Insurance

Variable life insurance is permanent coverage that lets you invest your cash value in a portfolio of subaccounts, the same as variable universal life insurance. The key difference is that the premiums on variable life insurance are fixed. You cannot adjust them up and down.

Indexed Universal Life Insurance (IUL)

Indexed Universal Life Insurance is a variation of universal life insurance that allows your cash value component to earn interest by tracking a stock market index chosen by your insurer. You can enjoy flexible premiums along with the chance to earn more interest. However, there’s also the chance you’ll earn less. These policies have more return upside and risk than whole life but less than variable and variable universal life.

Supplemental Life Insurance

Supplemental life insurance is an option for additional coverage that’s offered by some employers. If you find that the life insurance benefits your employee provides for free fall short of your needs but supplemental life insurance is available, you could consider adding it at your own expense.

Keep in mind, the policy types available will vary from one insurer to the next. To find the best deal, shop around and browse the offerings and pricing from at least three reputable life insurance companies.

How to Choose the Right Life Insurance Plan

Choosing the right life insurance plan for you and your loved ones is going to depend on a variety of factors. A good place to start is to think about why you want the policy. What do you hope to achieve from the death benefit and for whom?

For example, do you want to cover your end-of-life expenses, do you want to pass on an inheritance, or do you want to ensure your family is supported financially if you unexpectedly pass? Your answers can help to point you in the right direction.

Beyond that, other factors to consider include:

• What you can qualify for: Life insurance requires you to fill out an application and undergo an approval process. Your ability to qualify for coverage will depend on factors like your age, lifestyle habits, and medical history. You’ll want to find out if there are any plans that aren’t available to you.
• Your budget: How much can you spend on a life insurance policy per month and per year? The costs will vary greatly by the plan type and coverage amount you choose. Term life policies start as the most affordable but have a set expiration date.
• Whether you prefer predictability or flexibility: Term and whole life policies offer fixed premiums and death benefits, while other policies like universal life allow more flexibility. You’ll want to weigh the options to decide which is best for your budget and goals.
• If you want to build cash value: Are you looking to build cash value that you can withdraw or borrow against? If so, that will rule out term life policies.
• If you want control over your cash value’s growth: You’ll also need to consider how you want your cash value funds to be managed. Would you prefer a fixed rate of return? Then, a whole life policy would be best. If you want it attached to market interest rates, universal life would be the way to go. Further, variable life gives you a more hands-on situation where you can invest in a portfolio of sub-accounts.

By identifying your needs and understanding what the different types of life insurance policies offer, you can weigh your options to find the best fit for your situation. Then, you’ll be ready to shop around to find the best deal.

The Bottom Line

Life insurance can help you financially support loved ones after you pass away. Whether you want to cover your end-of-life expenses, pay off a mortgage, replace your income, or something else—it provides a way to do so.

However, the best life insurance plan for you is going to depend on various factors. It’s not one-size-fits-all. Now that you understand how the main types of life insurance work, you can weigh the features, pros, and cons to decide which will be most beneficial for your situation.If you still have questions or concerns, you can reach out to a financial advisor or insurance agent.