What Are the Types of Life Insurance?
Key Takeaways
- Life insurance is financial protection for beneficiaries and their families: Term life offers temporary coverage, while permanent life does not expire and has potential cash value.
- Final expense insurance is a type of permanent coverage with smaller payouts designed to cover funeral costs and end-of-life expenses.
- Premiums vary by policy type, with more affordable rates for term life.
- Eligibility often depends on medical underwriting, but not all policies require a medical exam.
Life insurance helps policyholders financially support their loved ones after their death. The most common types of life insurance are final expense, term, and whole life insurance. Life insurance can suit different needs and budgets, with each type offering varying term lengths, payout amounts, and optional riders.
This article breaks down the benefits of each life insurance type and how to find the right policy for you.
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What Is Life Insurance?
Life insurance helps reduce the financial burden of the policyholder’s passing. Upon the policyholder’s death, their chosen beneficiaries receive a death benefit payout. This payment can help replace income, pay outstanding debts, or cover the policyholder’s funeral and burial expenses.
Nearly 90 million U.S. families rely on life insurance for financial security. In 2023, Americans purchased $3.6 trillion in new life insurance policies. However, life insurance is not just for families. Some business owners purchase life insurance to keep their businesses running in the event of their death.
Common Life Insurance Plan Types
| Type | Category | Typical Payout | Medical Underwriting | Details |
| Term | Term | No upper limit | Required | Provides temporary and/or supplementary life insurance coverage for a set period of time |
| Whole | Permanent | No upper limit | Required | Provides lifelong coverage with a death benefit that can provide income replacement and more to beneficiaries |
| Final Expense | Permanent | Up to $25,000 | None | Provides lifelong coverage with a death benefit that can help pay off remaining debts and burial costs |
| Universal | Permanent | No upper limit | Required | Functions similarly to whole life insurance but premiums and death benefit can be adjusted |
| Variable | Permanent | No upper limit | Required | Functions similarly to whole life insurance but includes investment component to potentially boost cash value |
Life insurance falls into two main categories: term and permanent. Term life insurance provides financial protection for a specific period, usually 10 to 30 years. If the policyholder dies within that period, their beneficiaries will receive a death benefit. If they outlive the policy, the coverage ends and no death benefit is paid out. Term policies best suit those looking for additional coverage for a specific number of years, such as while their children are minors or while they are paying off a mortgage.
Permanent life insurance offers more expansive benefits. These policies last the policyholder’s entire life. In addition, many permanent life insurance policies feature a “cash value” component that accrues interest over time. Permanent life insurance policies typically cost more than term life insurance policies.
All other life insurance types fit into the category of either term or permanent policies:
- Standard term life insurance: This type of life insurance lasts for a set period. While 20-year policies are the most common, you can purchase a policy lasting 5-35 years, up until a certain age. In some cases, you can convert the policy to permanent life insurance when it expires.
- Whole life insurance: As long you pay your premiums, this policy will last as long as you live. Part of your premium goes toward a tax-advantaged savings account that grows cash value over time. You can access those savings at any time.
- Final expense life insurance: Final expense life insurance, sometimes called funeral or burial insurance, helps pay for medical bills, accounting or legal costs, and end-of-life expenses. It is considered permanent life insurance.
- Universal life insurance: A type of permanent life insurance, universal life allows you to adjust your premium payments and the value of your death benefit throughout the policy. You can withdraw or borrow against the cash value.
- Variable life insurance: In this form of permanent life insurance, you can choose investment options for your cash value account. Variable life insurance carries more risk because your savings can increase or decrease based on the market.
Factors to Consider For Each Type of Life Insurance
When evaluating life insurance options, there’s a lot to consider. Your total costs will vary significantly depending on your policy type and details, but all policies have the following factors in common.
- Premium: This is the monthly, quarterly, or annual fee required to maintain your policy. Permanent life insurance plans have the highest premiums because insurance companies are guaranteed to pay out a death benefit. Term policies tend to be less costly because it’s less likely that the insurer will have to pay. In either case, you must keep paying your premium on time to avoid cancellation.
- Death benefit payout: Your beneficiaries receive a set amount of money after your death. Policy type can impact the death benefit amount. For example, the death benefit for final expense insurance tends to be smaller because it is designed to cover end-of-life costs instead of replacing income.
- Eligibility criteria: Depending on the type of life insurance you are interested in, the application may include questions about your height, weight, lifestyle habits, hobbies, family history, and medications. Insurance companies use these answers to determine each applicant’s level of risk. Each company determines its eligibility requirements, but getting a policy when you’re young is usually more straightforward and less expensive.
- Medical underwriting: Most life insurance policies require an in-person medical exam. A medical professional may take your blood pressure, assess your heart, gather family health history, and get blood and urine samples. Depending on your situation, you might need further tests. An underwriter will review your results and determine your risk level. Higher-risk individuals usually pay higher premiums. No-exam policies are another option but can be more expensive.
Which Life Insurance Plan Type Is Best For You?
You might feel pressured to choose the best life insurance policy to protect your beneficiaries. Keep in mind that the best choice for you depends on your personal needs and your reasons for purchasing life insurance in the first place.
When to Consider Term Life Insurance
To start, consider your current financial situation and dependents. For example, if you recently purchased a home, have a young family, and are the primary income earner, then term life insurance might be a good fit for your needs. Purchasing a policy for 15 or 20 years could help your family pay off the mortgage and send your kids to college if you pass away during the policy term. If you outlive your policy term, your children may no longer be financially dependent on your income, and your home may be paid off by that time.
When to Consider Permanent Life Insurance
For lifelong coverage, consider permanent life insurance. These policies are more expensive in the short term, but they may offer higher payouts and guarantee a death benefit to your beneficiaries. They also accumulate cash value over time, which you can withdraw to cover a significant emergency depending on your policy’s terms and conditions.
Burial Insurance vs. Life Insurance
If you’re working with a limited budget, consider comparing final expense insurance vs. life insurance. Whereas standard life insurance offers a larger payout, it can also come with higher premiums. Final expense insurance (also called burial insurance), on the other hand, may feature lower premiums and a smaller payout that can help your beneficiaries handle your end-of-life costs.
Enrolling In Life Insurance
Once you’ve identified your priorities, shop around for policies. Consider the length of the term, your current and future health status, and whether you want to complete a medical exam. Keep in mind that if your health status is found to be poor during medical underwriting, you could be charged a higher premium or denied coverage altogether.
To enroll in a policy, follow the steps below.
- Choose your policy type. If you aren’t sure where to start, consider working with a licensed insurance agent or broker to get help determining which type of life insurance would best suit you.
- Get multiple quotes. Fill out preliminary applications online from multiple companies or work with an insurance broker. This can give you a starting point to understand potential costs.
- Complete an application. Apply directly with an insurance company or a licensed agent. Be honest on your application. Insurers can cancel your policy if they uncover false information.
- Complete a medical examination if necessary. Not all plans require a medical examination — also called medical underwriting — but many do. Follow your insurer’s instructions on how to complete the exam.
- Pay your first premium. You may have the option of paying monthly, quarterly, or annually. Ask if you get a discount for paying in advance, though not all insurers offer this option.
Secure your family’s future with Final Expense Life Insurance.
Contact GoHealth to find coverage that fits your needs.
Mon – Fri, 8 a.m. – 6 p.m. CT | TTY: 711
Putting It All Together
Life insurance helps provide for your beneficiaries in the event of your death. Your costs and eligibility depend on your policy type, health history, and risk factors. There are different types of life insurance with options to suit various budgets and preferences. Depending on your stage of life and financial situation, you may prefer final expense, term, or permanent life insurance. If you need help finding the right option, consider working with a licensed insurance agent or broker.
Sources
2023 NFDA General Price List Study Shows Inflation Increasing Faster than the Cost of a Funeral. National Funeral Directors Association.