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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 provide you with confidence that if the worst happens, the people who depend on you will be financially protected. The right life insurance policy can help your family maintain its financial obligations.
Life insurance 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.
(Here's how to tell if you need life insurance.)
Often, we'll hear the question, "What type of life insurance is best?" That'll depend greatly on your own situation and needs. A financial professional, the Insurance Information Institute (III), or your state’s “Department of Financial Services” or similar department can help you clarify your options.
Here are some of the most common policy types you might encounter.
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: That's the amount that the insurer will pay to your beneficiaries if you were to pass away.
Beneficiaries: That's 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 a spouse or children.
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 and 20 years.
Monthly premium: This is what you'll pay each month to keep your policy active.
Cash value: This is the policy's savings or investment component that grows over time, if your policy has this feature. Term life insurance doesn't have cash value.
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.
Most of the time, when you’re researching different types of life insurance, you’ll be presented with two main 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 years, 15 years or 20 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.
If you're looking for affordable online life insurance, check out term life insurance through Fabric.
This is an overarching name for life insurance that lasts your entire life (instead of expiring, as term life insurance does).
With a permanent life insurance policy, you can’t outlive your insurance protection. Even if you live to a ripe old age, the insurer will pay a death benefit to your beneficiaries (as long as you’re up-to-date on premium payments and there are no outstanding policy loans). Because these policies last your whole life, they often have higher premiums.
With this kind of policy, part of the premium accumulates as a cash value associated with a policy account. These life insurance benefits are tax-deferred, which means—as in some other accounts like a traditional IRA—that the interest growth you accumulate isn’t taxed annually. This can help the total amount compound and grow faster.
As a result, this type of insurance is sometimes used as a form of savings. Note, though, that there must always be a primary need for the death benefit—meaning you wouldn’t just buy a policy for saving purposes. In many cases, people use the cash value to pay their monthly premiums. This can provide some short-term liquidity because it means you wouldn’t need to pay your premiums during those months.
Other times, people use the cash value as a source of liquidity if they need cash down the line. This can take the form of a policy loan or withdrawal. Most of the time, you can borrow up to the “basis” tax free (that’s the value of the premiums you’ve paid).
If your cash value has increased past the basis, these gains will ultimately be subject to federal estate taxes and any other applicable taxes if the policy is surrendered.
And, of course, policy loans and withdrawals will reduce the available cash value and death benefit of your life insurance policy. If you take a lot of loans or withdrawals, this may even cause the policy to lapse. Withdrawals in excess of premiums paid will be subject to ordinary income tax.
If you've ever heard someone ask, "Which type of life insurance policy combines insurance and investing?" this is probably what they were referring to.
While cash accumulation features can be helpful in many circumstances, permanent life insurance isn’t necessarily the best way for you to grow a nest egg. Depending on your goals, your retirement and other savings might be better served by investing in stocks, bonds, mutual funds and similar investments.
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 higher than a term policy with similar coverage. Keep in mind, though, that if you continue to buy term life insurance over time—for example, your term expires so you buy a new term policy down the road, when you’re older and face higher rates—starting with whole life might make sense.
A 30-year-old, non-smoking man in excellent health in California might get a quote of $460+ per month for $500,000 coverage on a whole life policy (according to a quote we got from State Farm), and only around $24 monthly for 20-year term life. Of course, your personal situation and policy needs will determine your own rates. Just know that if you decide to purchase a whole life insurance policy, that does mean you’ll need to have the financial resources to pay the premiums.
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 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 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.
The “variable” factor of this type of policy is the rate of growth of the cash value. Instead of earning interest at a guaranteed minimum rate (as you would with a whole life policy), variable life insurance invests part of your premium in a select set of mutual fund sub-accounts.
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.
Let’s say a variable policy grows, on average, in keeping with the historic stock market average of about 10 percent. In that case, the cash value could accumulate much more than a whole life insurance policy with a lower (albeit guaranteed) growth rate.
The problem is that the market can vary widely. If you die in a year when the stock market is in a slump, you may end up leaving the cash value in worse shape than if you’d stuck with smaller, more reliable growth.
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 growth opportunities that come with investing in market funds (like 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. Some policies may guarantee that the death benefit won’t fall below a certain minimum, but there are market risks that can negatively impact your policy benefits.
You might also pay higher fees to cover management expenses for the sub-accounts, compared to if you set up a mutual fund investment outside of a life insurance policy.
This policy has more flexibility than some options, but it’s also more complicated.
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.
Accelerated underwriting isn't really a "type" of insurance, per se, but a feature 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 solid credit, 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 like Fabric try to get you a final answer without a physical exam. 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, with a policy like the one offered through Fabric, some applicants will still need a health exam. But in many cases, they can skip the exam while nonetheless accessing the more favorable rates that come with a medically underwritten policy. With Fabric, for example, it’s possible to skip a health exam if you’ve applied for less than $1 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.
Here's more on how no-exam life insurance policies work.
If you’re over 50, or even in your 40s with some health problems, buying life insurance can get tougher. Depending on your age and health, it can sometimes be difficult to find an insurer to sign you on for a policy at all.
With a simplified issue policy, you skip the typical life insurance medical exam and fill out a detailed questionnaire instead. 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.
If qualifying for life insurance is a serious hurdle, guaranteed issue takes things a step further than simplified issue. Almost no one gets declined for this kind of policy, so it’s helpful as a last-ditch resort. 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.
Guaranteed issue life insurance benefits are likely to cap around the amount your family will need to cover funeral costs and associated expenses. It’s not a great option for people hoping a death benefit will provide for dependents or constitute a large inheritance after their death.
If you qualify for another type of life insurance policy, you’d likely get better value by doing that. 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.
This is essentially another name for a term life insurance policy that’s been scaled to pay for a funeral.
Policies generally provide up to about $20,000 as the benefit. Despite the name of the policy, beneficiaries can use the payout for whatever they want, not just funeral-related expenses. This can be a good option for families that would struggle to cover final expenses on their own.
If you already have a term life insurance policy or another policy you like, you may not need extra coverage to handle final expenses.
To be clear: These are different from insurance policies sold through funeral homes. If you buy a life insurance policy through a funeral home, it will likely be designed to pay for specific, planned services. Funeral-home-specific policies often have many strings attached about how your beneficiaries can use the death benefit.
Shopping around for coverage? Factor final expense costs into your total needs (along with mortgage, debts, bills, etc.) and check with a financial professional for find the coverage amount that will protect your family’s finances.
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 many 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, many of these types of policies have low coverage amounts that aren't enough for lots of people. Here are several reasons why life insurance through work may not be enough.
Mortgage protection insurance, also sometimes referred to as mortgage payment protection insurance, pays off your mortgage if you die. In some cases, these policies might also cover all or some of your mortgage if you lose your job or become disabled.
The big difference between mortgage protection insurance and traditional life insurance is that mortgage protection insurance doesn’t pay an individual beneficiary. Instead, the insurance company pays your lender to cover the outstanding amount left on your mortgage. Essentially, in many ways, this type of insurance covers the bank.
If you get a mortgage without putting very much as a down payment, your bank may actually require you to get a policy of this sort. Here's what you need to know about mortgage protection insurance.
Accidental coverage covers you in the case of, well, an accidental death. In other words, death caused by an accident such as a car crash would be covered, but death caused by an illness such as cancer would not be.
With this kind of policy, if the policyholder meets the age requirements, they’re guaranteed approval regardless of their health. The coverage is instant, without any medical exam.
An accidental death and dismemberment 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.
Find out more about accidental death and dismemberment insurance.
This kind of life insurance is specifically for people with debts, such as a home equity loan. With this insurance, if you pass away, the insurer will pay your lender. In that way, it's similar to mortgage protection insurance. The main difference is that the loan in question doesn't necessarily have to be a mortgage.
This type of insurance insures two people at once (usually these are spouses).
Under a "first to die" policy, the insurer pays out after the first policyholder passes away. After that, the policy expires and the second person wouldn't be covered in case of death.
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.
It’s rare for term insurance to offer this option, but as a form of permanent life insurance this can be helpful for families with special-needs dependents who require lifetime care.
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.
|Type of Life Insurance||Term||Permanent|
|Variable universal life||x|
|Joint life (survivorship)||x||x|
Meanwhile, some of the variants we discussed above aren't really standalone "types" of insurance, but more like features or flavors of term or permanent policies. Below are some of the features you might see, and which types of policies you might find them in.
|Type of Life Insurance||Term||Permanent|
|No-exam accelerated underwriting||x|
|Group life insurance||x||x|
|Final expense/burial insurance||x|
|Return of premium||x|
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 face value of the policy stays 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’d 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. This type of term life insurance isn’t popular anymore, as more people tend to prefer a 20-year policy.
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 term life insurance policy, you'd pay the same monthly premium for the duration of the term.
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. The pros and cons are similar to single premium. You’ll be guaranteed coverage once you’re done paying and you’ll get faster growth early on, but you’ll face much higher 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 (including return of premium) cost extra money since they provide additional benefits.
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 with an interest-earning component that can potentially be accessed in the future.
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:
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.
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 and grow as an asset over time, then you might want to go with a permanent life insurance option such as whole life.
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, there's a good chance you'll 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 is likely to be a good choice. 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.
If you're in the market for affordable online life insurance, consider applying online through Fabric, which takes about 10 minutes.
If you apply and are approved for a policy through Fabric, 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.
Given all the options for life insurance, if you're healthy, you'll usually find the best rates with medically underwritten insurance. That includes no-exam life insurance that is still medically underwritten, such as term life insurance offered through Fabric. 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 you're health isn't great, you might need to go with another option, like guaranteed issue or accidental death insurance.
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, such as Fabric) offer a digital experience.
That means you can apply for coverage online or from Fabric's mobile app without getting on the phone with a salesy agent. If you're approved without a health exam, you might get an offer immediately and be able to start your coverage then and there.
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, your best option (if available) may be 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 to make sure you’ll be able to do so down the line. (Term life insurance through Fabric, for example, can be converted to whole life.)
The specifics of conversion varies from product to product and insurance carrier to insurance carrier. So, make sure you understand how this option works and if it’s available before you make a purchasing decision.
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.
This material is designed to provide general information on the subjects covered. It is not, however, intended to provide specific financial advice or to serve as the basis for any decisions. Fabric Insurance Agency, LLC offers a mobile experience for people on-the-go who want a easy and fast way to purchase life insurance.
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Accidental Death Insurance policies (Form VL-ADH1 with state variations where applicable) and Term Life Insurance policies (Form ICC16-VLT, ICC19-VLT2, and CMP 0501 with state variations where applicable) are issued by Vantis Life Insurance Company (Vantis Life), Windsor, CT (all states except NY), and by The Penn Insurance and Annuity Company of New York (NY only). Coverage may not be available in all states. Issuance of coverage for Term Life Insurance is subject to underwriting review and approval. Please see a copy of the policy for the full terms, conditions and exclusions. Policy obligations are the sole responsibility of Vantis Life.
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