11 Different Types of Life Insurance — What You Should Know

Starting a family means creating a shared life based on your goals and values. If something happens to you, your partner may not be able to hold everything together alone. The burden can be especially heavy if you have children.

Life insurance can help provide you with confidence that if the worst happens, to help protect the people who financially depend on you. The right life insurance policy can help your family maintain its financial obligations.

Life insurance death benefits can be used for many things, like mortgage payments, or to help your family spend money on something you value, like enrolling your children in private school.

In terms of what type of life insurance is best for you, that depends on your situation and needs. A financial professional can help give you insight into your options. Here are some common policy types and what advantages they can offer.

The Key Features of Life Insurance

When you're exploring different types of life insurance, there are a number of factors that you'll want to choose between. These include:

• Death benefit: The amount that the insurer will pay to your beneficiaries if you were to pass away. This might also be called the “face amount,” and represents, at a fundamental level, how much insurance coverage you have.

• Beneficiaries: The person or people who should receive the money from your life insurance if you were to pass away. Typically, these are people who depend on you financially, such as your spouse.

• Policy term: If you go with a term life insurance policy, then it's active for a specific duration, called a term. There are many different terms available; common ones include 10, 15, 20 and 30 years.

• Monthly premium: This is what you'll pay each month to keep your policy active.

• Cash value: A portion of your premium payments goes towards building this cash value

  with the potential to earn interest and grow. Term life insurance doesn't have cash value. Keep in mind, cash value may take years to accumulate, unless a large premium is paid up front.

What Are the Different Types of Life Insurance?

There are many different types of life insurance. Each comes with a number of factors to consider—these vary based on how each insurance product is designed. Examples include things like how long coverage lasts (whether for a specific length of time or your whole life) and how you pay your premiums (for example, whether your premiums stay the same or decrease over time).

Your life insurance priorities can also shift based on age, meaning people in their 20s, 30s and 40s might shop for life insurance differently.

Here’s what you need to know.

1. Term life insurance

Often, when you’re researching different types of life insurance, you’ll be presented with two marquee options: term life insurance and whole life insurance. What many people don’t realize is that these are more like general categories and there’s still a lot of variation to consider.

Term life insurance is one of the most popular types of life insurance. It offers death benefit protection for a specific time period, such as 10, 20 or 30 years. Because it only pays out in the event of the insured’s death, term life insurance is also a very affordable way to obtain coverage.

You pay a premium during a specific length of time (the term). If you die during the term, your beneficiary receives a death benefit. If you don’t, the term ends and you get no cash value or other payout from the policy.

A 20-year term is popular because many families use term life insurance as protection while their kids are growing up. Term life is typically used to replace the income you would have contributed toward housing, education or lifestyle activities like extracurricular sports for the kids.

2. Whole life insurance

Whole life insurance is one of the most common permanent life insurance options. It offers consistent premium payments and a guaranteed interest rate on your cash value.

Since this is a type of permanent life insurance, you can expect the monthly premiums to be substantially higher than a term policy with similar coverage. Your personal details and policy needs will determine your rates, but it’s not uncommon to see whole life premium rates cost more than 10 times as much as a term life policy for a comparable applicant and policy value. If you decide to purchase a whole life policy, you’ll want to ensure that the premiums fit your budget and feel like a worthwhile expense.

Whole life can be a good fit for people who expect to need lifelong coverage (whole life insurance provides lifelong coverage as long as premiums are paid). For example, people who have children who will need care throughout their life may opt for a whole life policy to help provide funds for this care. Another benefit of having whole life coverage is if your term life policy expires and your health has declined considerably, it can be more challenging to find replacement coverage. Note that increases in coverage are subject to underwriting based on health and other factors.

3. Universal life insurance

Universal life is another type of permanent life insurance. Universal life insurance provides more flexibility than whole life; it may allow you to adjust the death benefit without opening a new policy (subject to the terms of the contract). You can potentially increase your death benefit down the road, too, if you pass certain medical and any other requirements.

Additionally, you may be able to lower your premium payments or stop them altogether by paying from the cash value account. The trade-off here is that you may need to make higher premium payments down the road if the cash value drops to zero, or else the policy may lapse. If you pay a lower premium than the amount selected at the time your policy was issued, or if you skip a premium, then there must be enough cash value in the policy to cover your monthly charges. You may need to make additional premium payments to keep the policy in force.

If you want the option of some flexibility and you think permanent life insurance is your best fit, universal life may give you room to adjust as you go.

4. Variable life insurance

Variable life insurance is a permanent life insurance policy that combines a death benefit with a cash value component that can be allocated among investment options. Funds can be allocate to different sub-accounts and the cash value fluctuates based on the performance of the selected sub-accounts. Variable life carries market risk and the performance of the sub- accounts impacts the cash value. Policy values are not guaranteed and will fluctuate based on market conditions.

There’s more potential for growth, but also more risk, because your money is subject to market risk. You may also have the option to allocate a portion of the funds to a fixed account not subject to market fluctuations, to incorporate a layer of protection from market declines. Your cash value has the potential to grow base don the performance of selected sub-accounts, which fluctuate with the market, but with variable life insurance, you are not directly investing in the stock market.

The risk is that the market can vary, and you can’t predict or choose when your life ends.

Policyholders should consult a financial professional to understand risks, fees, and expenses associated with variable life insurance.

5. Variable universal life insurance

As the name suggests, this option combines features from variable life and universal life insurance policies. This kind of policy lets you adjust the death benefit and premiums (like universal life insurance), and also gives you the potential growth opportunities that come with variable life insurance.

The main downside is that your death benefit as well as cash value can decrease if your investments don’t perform well. Policy fees and insurance charges can also reduce your cash value. Some policies may guarantee that the death benefit won’t fall below a certain minimum, if conditions are met, but there are market risks that can negatively impact your policy benefits. Poor investment performance or inadequate premium payments may require additional funding to keep the policy in force.

This policy has more flexibility than some options, but it’s also more complicated. Work with a financial professional to confirm whether this sort of policy aligns with your financial goals.

6. No exam life insurance

When people refer to “no-exam” insurance, there are a few different things they may be talking about. Some come with a higher price tag or limited coverage and others don’t; no-exam policies may have higher costs, stricter requirements or limited coverage options associated with them, depending on the type of underwriting used. As with anything, there are certain pros and cons to “no-exam” insurance.

Accelerated underwriting is a feature available for some policies. With accelerated underwriting, your application will go into detail about your medical history, finances, any risky hobbies you might have and more. If you have good health and favorable lifestyle factors, the insurer may be able to approve your application right away by using algorithms to consider your levels of risk.

Even if these advanced algorithms can’t make you an offer right away, companies may do their best to get you a final answer without a physical exam, when possible. To do this, underwriters might do things like request your doctor’s records, review your prescription history or ask you follow-up questions.

In some cases, applicants will still need a health exam. But in other cases, some applicants may be able to skip the exam. With Fabric by Gerber Life, for example, it’s possible to skip a health exam if you’ve applied for less than $1.5 million in coverage and you meet all other qualifications.

In other cases, if you have health issues or are not being approved for a medically underwritten policy that enables you to skip the exam, you might look at other options such as simplified issue life insurance or guaranteed issue insurance.

7. Simplified issue life insurance

As you get older and begin to face health problems, buying life insurance can get tougher. Depending on your age and health, you might turn to options offered by insurers for older applicants or those with health concerns.

With a simplified issue policy, you skip the typical life insurance medical exam and fill out a detailed questionnaire instead. Some policies may require additional underwriting, but simplified issue policies generally do not feature health exams. The premiums tend to be higher and the coverage options might be lower than you’d get with a term life insurance policy, but this can sometimes be a good option for seniors or people with moderate health risks.

8. Guaranteed Issue Life Insurance

If qualifying for life insurance is a serious hurdle, guaranteed issue takes things a step further than simplified issue. These policies do not require medical underwriting, making them an option for most applicants who meet the insurer’s eligibility criteria, such as age and residency requirements. Because they are guaranteed issue, these policies tend to be more expensive for the same amount of coverage compared to non-guaranteed policies.

In addition, guaranteed issue policies typically have graded benefits, which means that the payout would be reduced if you pass away during the first two years of coverage. The payout may be limited to a return of premiums paid plus interest rather than the full death benefit, unless death is due to an accident.

Guaranteed issue life insurance benefits are often used for final expenses, and coverage limits vary by insurer. This life insurance is generally not designed to replace income or leave a large financial legacy. These policies can still provide value to others who may not qualify for other policies. But if you aren’t getting approved elsewhere, simplified and guaranteed issue policies can be useful to ensure you have at least some degree of coverage.

9. Group life insurance

In most cases, this refers to life insurance that you can get through your job as an employee benefit. You may receive a certain amount of life insurance for free through work, plus you might have the option to purchase additional coverage.

For some people, group life insurance can be an affordable way to get coverage quickly. That said, there are drawbacks to relying on your job for life insurance. First and foremost, you may not be able to take it with you if you switch jobs. Plus, types of policies may not offer the coverage amount your family needs to replace your income if you were no longer around.

10. Accidental death (and dismemberment) insurance

Accidental death (AD) coverage covers you in the case of, well, an accidental death—a qualifying accident as defined in the policy.

Applicants that meet the age and eligibility requirements are typically approved without a medical exam, however exclusions may apply based on high risk activities and waiting periods.

An accidental death and dismemberment (AD&D) policy covers you in the case of an accidental death and in case you survive but suffer an injury that's covered by the policy (i.e. dismemberment). In the case of an accidental death, the beneficiary would collect the payment. In the case of a dismemberment, the insured would be the one to collect the amount payable. Dismemberment benefits vary and are often based on the severity of the injury. Partial benefits may apply.

Some policies just cover accidental death, while others also cover dismemberment. Here's how AD vs. AD&D policies stack up. These policies typically are used as supplemental coverage rather than primary life insurance coverage.

11. Joint life insurance (survivorship insurance)

This type of insurance insures two people under a single policy (usually these are spouses).

Under a "first to die" policy, the insurer pays out after the first policyholder passes away. After that, the policy may expire and the second person may not be covered in case of death. Some policies may offer a conversion option or allow the surviving policyholder to purchase new coverage.

Under a "second to die" policy, the insurer would pay out after both policyholders die. This would, for example, provide for a dependent after both spouses are gone, or cover estate taxes.

Although it is less common, some insurers offer joint term life insurance policies. As a form of permanent life insurance, joint life insurance policies can be helpful for families with special- needs dependents who require lifetime care.

Comparing and Contrasting Life Insurance

Of the policy types we've discussed, some are categorized as term and some are permanent, and some are available as either. This distinction is very important because those two broad categories of insurance function differently.

Life Insurance Plan Variations to Know

You’ve read through a long list of different types of life insurance already. But wait (as they say), there’s more! Most policies offer variations on how you can structure premium payments. Some helpful terms include:

• Level term life insurance: The policy’s premium and face value typically stay the same throughout the duration of the policy term. That’s why it’s called “level” term life insurance. Essentially, if you die during the term, the payout amount is the same no matter how much time is left on the policy.

• Increasing or decreasing term life insurance: The death benefit increases or decreases during the policy term. For example, maybe your decreasing term life insurance policy would pay out $750,000 at the beginning of your term, but $250,000 at the end. A decreasing term may make sense if you were seeking to cover your mortgage, for example, as it would take less to pay it off over time.

• Annually renewable term: This term life insurance lets you renew each year up to a specified age, even if your health or other risks would get you rejected from a new policy. Some people may find this option beneficial, though more people tend to prefer a term life policy that covers them for a specific period.

• Continuous, fixed or level premium: A type of life insurance policy in which you pay premiums throughout the duration of the policy (i.e. up until your death). So, with a fixed premium life insurance policy, you'd pay the same monthly premium throughout the duration of your coverage.

• Single premium: You pay a lump sum at the beginning, which grows tax-deferred to create the death benefit. This is an option for many whole life or variable life insurance policies. The upfront cost can make it cost-prohibitive for many families. That said, if you can afford it, you won’t risk the policy lapsing due to failure to pay premiums. You’ll also get a better jump-start on growing the cash value.

• Limited pay: You pay premiums for a set amount of time, or to a specific age. After that, you’re done paying but get to keep the coverage. You’ll be guaranteed coverage once you’re done paying and cash value may accumulate faster early on, but this depends on your policy’s structure. You will likely face much payments than with level premium.

• Riders: Broadly speaking, life insurance riders are policy add-ons. A long-term care rider, for example, could let you use part of the death benefit to cover hospice care instead of only making funds available once you’ve died. With a return of premium rider, if you outlive your policy, the insurer will refund the premiums you've paid over time. Many riders cost extra money since they provide additional benefits.

What's the Best Type of Life Insurance to Get?

People often ask us, "What life insurance should I get?" But the "best" type of life insurance to get is like the "best" house: The right fit is going to differ from person to person.

Many families opt for a term life insurance policy because it’s a way to gain affordable coverage for a set period of time.

While monthly premiums for permanent life insurance tend to be more expensive, permanent insurance might make sense if you’re looking for coverage that doesn’t end at a set time. It might also work for you if you’re looking for something that can build cash value over time.

To figure out the best life insurance to get for your needs, collect all your important financial documents (assets, debt, etc.), and have a conversation with your partner. Discuss the lifestyle that fits your present and future needs, to help figure out how much life insurance coverage you need. You might also meet with a financial professional to determine what coverage is right for your particular circumstances.

Consider the following factors in deciding what life insurance to get:

• Income

• Debt

• How long people will be depending on you financially

• Major financial commitments, like a mortgage or a business

• Your age and health

• Overall financial goals

Think about the financial worry areas if you lost your income, like how to pay your mortgage or put your kids through college. How much would it take to keep your current financial goals on track? From there you can figure out how much coverage makes sense and what type of policy best suits your needs.

Questions to Ask as You Choose an Insurance Type

1. What’s your goal with this type of insurance?

If your top goal is to help protect your family's finances if something were to happen to you, then an affordable term life insurance policy may make sense for your needs. On the other hand, if you want coverage to last a lifetime (as long as premiums are up to date) and build cash value over time, then you might want to go with a permanent life insurance.

2. How much can you afford?

At the end of the day, you need a policy that you can afford. After all, if you choose a policy that has monthly premiums that are out of your budget, you may fail to pay on time at some point. And if you don't keep up with your monthly premiums, your policy could go out of force and stop covering you.

So, in addition to thinking about what you want, consider what kind of payment you can manage on a monthly basis. Generally, if cost is an issue and you simply want to help protect your family, term life may be an option. And if you're looking for additional ways to lower your premiums, you can do so by lowering your total coverage amount or your term length. However, it is important to ensure your policy provides adequate protection for your needs.

If you're in the market for affordable online life insurance, consider applying online through Fabric by Gerber Life, which takes about 10 minutes.

If you apply and are approved for a policy, you'll have the option to change your term length and coverage amount after you've received your final offer. That way, if the final offer comes in higher than you were hoping for, you have the opportunity to tweak the parameters to find a policy you can afford.

3. Are you in good health?

If you’re in good health, you may qualify for lower premiums with a medically unwritten life insurance policy. Some no-exam life insurance policies, such as those offered through Fabric by Gerber Life, use medical underwriting. With a policy like that, some applicants will still need to undergo a health exam, but some will be able to skip it. All applicants are medically underwritten, though, as the application asks about your health and underwriters will take your medical situation into account when making a decision.

If your health isn't great, you might need to go with another option, such as guaranteed issue or accidental death insurance, among other choices.

4. Do you prefer to apply online rather than in person?

Back in the day, applying for life insurance meant meeting with an agent in person or over the phone, and submitting to a health exam. But these days, more companies (ahem) offer a digital experience.

That means you can apply for coverage online or from Fabric's mobile app. If you're approved without a health exam, you might get an offer immediately and be able to start your coverage then and there.

How to Change Your Life Insurance Policy

It's a good idea to check your life insurance choices each year to see if your needs have changed. Fortunately, you’re not locked into one life insurance policy forever, so you can make changes later if you realize that another type of policy would fit your life better.

If you choose this path, you may be able to convert an existing policy from one type to another. That’s because canceling a policy means starting from scratch and getting a new one. That would include redoing medical exams, applications and other steps you took when you first applied.

Some people start with a term life insurance policy because of the lower premiums. Then they might convert it to a whole life insurance policy later on, once they have more income to pay higher premiums. If you think you might want the option to convert your life insurance policy type, ask during the application process whether your term life policy is convertible.

Life insurance policies range from simple and inexpensive to much more complex, pricey policies. Every type of life insurance has its pros and cons. No matter your situation, the best plan for you is to be well-informed so you can pick the course that offers what you really need.

Fabric exists to help young families master their money. Our articles abide by strict editorial standards.

Information provided is general and educational in nature, is not financial advice, and all products or services discussed may not be offered by Fabric by Gerber Life  (“the Company”). The information is not intended to be, and should not be construed as, legal or tax advice. The Company does not provide legal or tax advice. Consult an attorney or tax advisor regarding your specific legal or tax situation. Laws of a specific state or laws relevant to a particular situation may affect the applicability, accuracy, or completeness of this information. Federal and state laws and regulations are complex and are subject to change. The Company makes no warranties with regard to the information or results obtained by its use. The Company disclaims any liability arising out of your use of, or reliance on, the information. The views and opinions of third-party content providers are solely those of the author and not Fabric by Gerber Life.