What are the different types of life insurance?

(And why is it so confusing?)

  • A life insurance policy is a contract with an insurance company. In exchange for premium payments, the insurance company provides a lump-sum payment (known as a death benefit) to beneficiaries—a designated person or group that receives the benefit—upon the insured person’s death.
  • It may seem simple, but understanding insurance types can also be confusing. Much of this confusion comes from the insurance industry’s ongoing goal to design personalized coverage for policyholders. In designing flexible policies, there are a variety to choose from—and all of those insurance types can make it difficult to understand what a specific policy is and does.
  • Below, we’ve broken down a few of the most common types of life insurance policies to simplify things. The best place to begin is to talk about the difference between the two types of basic life insurance: term life insurance and permanent life insurance.
What is term life insurance?
  • Term life insurance can provide affordable, high-coverage protection for a specific period—or term. The policy pays a benefit to your beneficiary if you pass away during the term. Common terms are 10, 20, or 30 years.
  • There are two main types of term life insurance—level term life insurance and decreasing term. Level and decreasing refer to the amount of the death benefit during the term of the policy. A level term life insurance policy pays the same death benefit amount if death occurs at any point during the term. A decreasing policy pays a death benefit that gradually decreases over the policy’s span.
  • There are also a few variations on term life insurance. One, called group term life insurance, is common among insurance options you might have access to through your employer. This type of insurance provides a base amount of coverage for all employees. This is typically done at no cost to the employee, with the ability to purchase additional coverage that’s taken out of the employee’s paycheck.
  • Another variation that you might have access to through your employer is supplemental life insurance. Supplemental life insurance can include accidental death and dismemberment (AD & D) insurance, or burial insurance—additional coverage that will help your family in case something unexpected happens to you. You can also purchase this type of insurance individually.
What is permanent life insurance?
  • Permanent life insurance simply refers to any life insurance policy that doesn’t expire. There are several types of permanent life insurance—the most common types being whole life insurance and universal life insurance.
What is whole life insurance?
  • Whole life insurance is exactly what it sounds like—policy that offers coverage for your entire life, provided you pay your monthly premium, or payment. With whole life, your insurance rates are often higher than what they’d be for a term life insurance policy, but your rate is usually locked in for life. Think of whole life insurance as a contract of sorts—if the terms of that contract are met, your policyholder will pay the benefits to your policy’s beneficiaries when you pass away.
What is universal life insurance? How is it different from whole life insurance?
  • Unlike whole life insurance, universal life insurance offers more flexibility, specifically when it comes to premium payments, the amount of the death benefit, and the savings/investment portion of the policy. Universal life insurance policyholders can change the amount and frequency of premiums payments, so long as the first premium payment is made. This allows you to build investment savings and have a life insurance policy at the same time.
  • A variation, called indexed universal life insurance, gives a policyholder the option to divide cash value amounts to a fixed account (low-risk investments that will not be affected by the stock market) or an equity indexed account, such as Nasdaq 100 or the S & P 500. The policyholder has the choice of how much to allocate to each account.
What is variable life insurance?
  • Variable life insurance can be described as permanent life insurance with an investment component. The policy’s cash value can be invested in subaccounts, and this has the potential to grow as the investments in those subaccounts grow. On the other hand, the cash value might decrease if the investments decline.
What is mortgage life insurance?
  • Mortgage life insurance is insurance that you still pay premiums to make sure you keep your monthly coverage, but instead of a designated person or persons being the beneficiary of your policy, your mortgage lender is your beneficiary. This ensures your lender is paid the balance of your mortgage if you pass away.
What is dependent life insurance?
  • Dependent life insurance is coverage that is provided if a spouse or dependent child passes away. This type of coverage is typically used to off-set expenses that occur after death, so the amount is typically small. Often, people consider this kind of policy to cover a spouse who is not legally separated from the policyholder, or unmarried children, stepchildren, or adopted children of a specified age.
What is final expense life insurance?
  • Final expense life insurance is designed to cover bills your family or loved ones might face after you pass away—things like funeral expenses or medical bills. This type of insurance is also called burial insurance. While it may seem strange to take out life insurance for this type of activity, funerals—even simple ones—can have a price tag of several thousand dollars by the time all costs are factored in.