Types of Life Insurance

Two broad categories: term and permanent

Nearly every life insurance product falls into one of two broad categories. Term insurance covers a fixed period and generally has no cash value component. Permanent insurance is designed to last for the insured's lifetime and generally includes a cash value account that accumulates over time.

Within permanent insurance, several product types differ mainly in how the cash value grows, how much control the policyholder has over that growth, and how much risk is involved.

Term life insurance

Term life insurance provides a death benefit if the insured dies within a specified period, commonly available in ranges such as 10, 20 or 30 years. Premiums are typically level for the duration of the term, and coverage generally ends at the term's expiration unless renewed or converted.

Term policies are generally the simplest structure and do not include a savings or investment component.

Whole life insurance

Whole life insurance is a form of permanent coverage with a cash value that grows according to a schedule set by the insurer, often with guaranteed minimum growth and, for participating policies, potential dividends declared by the insurer (dividends are not guaranteed).

Premiums for whole life are generally fixed and level for the life of the policy, and the death benefit is generally fixed as well, absent optional riders.

Universal life insurance

Universal life insurance is permanent coverage that generally offers more flexibility than whole life. Policyholders may be able to adjust premium payments and death benefit amounts within limits set by the policy, as long as the cash value remains sufficient to cover the policy's costs.

Cash value in a standard universal life policy typically grows based on a credited interest rate set by the insurer, which may have a guaranteed minimum. If premiums are reduced or cash value is depleted by policy charges, the policy can lapse, so flexibility comes with the responsibility of monitoring the policy's funding.

Indexed universal life insurance

Indexed universal life (IUL) is a variation of universal life where cash value growth is linked, in part, to the performance of a market index, subject to caps, participation rates, and floors defined by the policy. A floor generally limits losses from negative index performance, while a cap limits how much upside growth is credited.

IUL policies do not directly invest in the index; the index is used only as a reference for calculating credited interest, and the specific formula, cap and floor vary by insurer and by policy, and can change over time within the contract's terms.

Variable life insurance

Variable life insurance allows the policyholder to allocate cash value among investment sub-accounts, similar to mutual funds, meaning cash value (and in some designs, the death benefit) can rise or fall based on investment performance. This introduces investment risk that is not present in whole, universal or indexed universal products.

Because variable life involves securities, it is typically regulated as both an insurance and a securities product, and is generally sold with a prospectus. It is often the most complex and highest-risk category among common permanent life products.

Variable life insurance involves investment risk, including possible loss of principal in the cash value. Review the prospectus and consult a licensed professional before evaluating this product.

Final expense (burial) insurance

Final expense insurance, sometimes called burial or funeral insurance, is generally a smaller whole life policy designed to cover funeral costs, medical bills or other end-of-life expenses. Coverage amounts are typically modest relative to standard life insurance policies, and underwriting is often simplified, sometimes with few or no health questions.

Because underwriting is often simplified, premiums per dollar of coverage can be higher than for fully underwritten policies, and some policies include a graded death benefit that limits payouts if death occurs from certain causes within the first few policy years.

Group life insurance

Group life insurance is typically offered through an employer or an association, often as term coverage, with the amount frequently based on a multiple of salary or a flat benefit. Group coverage often does not require individual medical underwriting up to a certain amount, particularly if enrolled during an initial eligibility period.

Group coverage is often not portable, meaning it may end if employment ends, though some plans allow conversion to an individual policy within a limited window, generally at a higher cost and without the original group rate.