Different types of life insurance

There are many types of life insurance policies that can help protect your family, and they all fall into two main categories: term and permanent.

With term life insurance policies, you get coverage for a defined length of time (say, ten years). If you die during that time, money is paid to your beneficiaries – but when the term is over, you must get new coverage or go without.

Permanent life insurance (i.e., whole life and universal life). A permanent life insurance policy provides life-long death benefit coverage and also includes a “cash value” component that can help with many objectives, like helping to build your retirement nest egg while providing protection for life and other financial benefits along the way.^1,2 To help you decide which kind of protection will work best for you, here are some things this guide will cover:

• The basic features of a life insurance policy

• The different kinds of policies you can buy including:

  1. Term life insurance

  2. Whole life insurance

  3. Universal life insurance

  4. Variable life insurance

  5. Indexed universal life insurance

  6. Final expense insurance

  7. Simplified issue and guaranteed issue life insurance

  8. Group life insurance

• How to choose the right policy for you

Choosing the right life insurance policy depends on your financial goals, your current budget, and your long-term plans. This guide will help you to understand your options and make an informed choice. Then, when you decide to buy life insurance, you can choose from various methods, such as contacting a local agent or financial professional, exploring online marketplaces, or reaching out directly to insurance companies.

What are the basic features of a life insurance policy?

At its core, a life insurance policy is a promise to provide financial protection to your loved ones if you’re not there. The way a policy carries out that promise is defined by a few key features:

• The death benefit: The amount of money the insurance company will pay when the insured person dies. Typically, this benefit is income-tax-free.³ The life insurance company is responsible for assessing risks, processing claims, and determining premiums.

• The beneficiaries: The person or people who get the death benefit. It can all go to a single person (e.g., a surviving spouse) or be divided by percentage among a few people (e.g., a spouse could get 50%, and two adult children could each get 25%). And by the way, a beneficiary doesn’t have to be a blood relative or even a person – if you choose, you can leave all or part of your death benefit to an entity, such as a charitable cause.

• The policy length or term: The time period that the insurer agrees to pay a death benefit. A term policy is defined as a specific number of years, such as 10, 20, or 30. A permanent policy lasts for the life of the insured (for whole life as long as premiums are paid, and for universal life as long as the policy is funded properly to pay monthly expenses.

• The premium: The monthly or yearly payments needed to keep the policy in effect.

• The cash value: The policy’s cash value component can build over time and can be cashed out or borrowed against.^4,5 A permanent life insurance policy is a cash value life insurance policy. A term policy has no cash value.

All of the above should be considered when choosing a policy that fits your needs.

The different types of life insurance policies and their key features

1. Term life insurance

A term life policy is exactly what the name implies: Coverage for a specific term or length of time, typically between 10 and 30 years. It is sometimes called “pure life insurance” because, unlike whole life insurance, the policy has no cash value. It’s designed solely to give your beneficiaries a payout if you die during the term.

Most individual term policies have level premiums, so you pay the same amount every month. When the term expires, there’s no more coverage — you either have to go without or get a new policy, which will likely come at a higher cost: the older you are, the more expensive it is to get a policy. However, many providers — including Guardian — will allow you to convert a term policy to permanent life insurance for part or all of the coverage period. If you receive insurance through an employer, rates are typically issued “on attained age,” which means the rates will increase over time.

This calculator can help you determine the cost of term life insurance at your desired coverage level. How many years will your family need financial protection? For most people, until the kids are grown up, the house is paid off, and there's some money that can serve as protection for the surviving spouse.

Who should consider term life insurance?

Term life insurance generally has lower premiums, helping you save on your monthly expenses. On the other hand, it only provides a benefit for a limited period of time — and there is no cash value component that grows over time. That said, it may be a good fit for:

• Young families: Families that want financial protection until their young children come of age may choose a 10- or 20-year policy.

• Families with mortgages: Families that want financial protection until their mortgage is paid off can also benefit from term life.

• Those anticipating a need for temporary financial protection: Any household that seeks temporary protection can benefit. For example, a couple approaching retirement may choose term life just in case one spouse passes away before social security and other retirement benefits kick in.

2. Whole life insurance

A whole life policy is the simplest form of a permanent life insurance policy, providing coverage that lasts your entire life. Like other permanent policies, it includes a cash value component: A portion of your premium dollars are placed into a cash value account, and this sum grows over time on a tax-deferred basis, so you don’t pay taxes on the gains.³

Compared to other forms of permanent life insurance coverage, a whole life policy has three defining characteristics:

• The level premium payments remains the same for life

• The death benefit is guaranteed as long as the guaranteed premiums are paid.⁶

• The policy includes guaranteed cash values that grow at a guaranteed rate

Cash value provides several significant benefits you can use while you’re still alive. It takes a few years to grow into a useful amount, but once that happens, you can borrow money against it, use it to help pay your premiums, or even surrender it for cash to live on in retirement.⁷

Plus, when you get this type of policy from a mutual company, such as Guardian, your cash value can earn annual dividends.^8[viii] You get a portion of the insurer’s profits, which can be used to increase the value of your policy and provide other benefits. While not guaranteed, Guardian has paid participating policyholders a dividend every year since 1868.

Who should consider whole life insurance?

This type of policy may be a good choice if you’re concerned with:

• Building wealth: Allows you to accumulate cash value on a tax-deferred basis. Many people consider it to be a good savings vehicle.

• Estate planning: Can be a powerful estate planning tool.

• Wealth transfer: Can be used to pass wealth on to beneficiaries in a tax-efficient manner.

• Final expenses: Can be used to cover end-of-life expenses, such as medical care, outstanding debts and funeral expenses.

3. Universal life insurance

A universal life policy offers the same cash value and lifetime coverage benefits as whole life. But there’s a fundamental difference: the premium payments are flexible.

With this type of policy, you can raise or lower the amount you pay within the limits of the policy.⁹

Who should consider universal life insurance?

This type of policy may be a good fit for:

• Households with variable income: Premium payments can be changed periodically to adapt to changing income levels.

• Those seeking faster cash value accumulation: If you choose to pay higher premiums, your policy will accumulate cash value faster.

4. Variable life insurance

Variable life insurance — also known as "variable universal life insurance"¹⁰ — is a type of universal life insurance that allows the cash value component to be invested in stocks, bonds and other investment vehicles. Variable life insurance also offers flexible premiums.

Who should consider variable life insurance?

Variable life may be a good fit for:

• Those with a higher risk tolerance: Variable life allows you to invest in stocks and other investment vehicles, which creates more potential for growth — but also creates more risk.

• Those seeking diversification in investment vehicles: A variable life policy can be another tool in your investment toolbox.

5. Indexed universal life insurance

Indexed universal life insurance aims to balance investment risk and reward. Like other forms of universal life, indexed policies also offer flexible premiums.¹¹

With indexed universal life, you can link your cash value growth to the performance of a stock market index, such as the S&P 500.¹² These policies use downside protection and upside caps, which means that during a bad year for the market, your cash value will not decline, but in a good year for the market, your cash value won’t grow as much as the index itself. Essentially, you’re trading a bit of upside potential for downside protection.

Who should consider indexed universal life insurance?

Indexed policies may be a good fit for: Those who would like to enjoy some stock market returns without taking on a lot of stock market risk.

6. Final expense insurance

Final expense insurance is a form of life insurance intended only to cover end-of-life expenses such as funeral and burial costs. Older people often buy final expense insurance because it helps to protect loved ones who might otherwise have to cover these costs out-of-pocket. While the premiums for these policies tend to be modest, there is no cash value component, and the death benefit is very limited.

7. Simplified issue and guaranteed issue insurance

Most life insurance policies require a medical exam as part of the application process so that the provider can assess your risk to insure. Simplified issue and guaranteed issue policies don’t require a medical exam. These policies are primarily designed for older applicants or those with serious health problems who may not qualify for policies that require a medical exam.

Some term policies and most final expense policies are either simplified issue or guaranteed issue. When applying for a simplified issue policy, you'll be asked to fill out a health questionnaire in place of an exam. With a guaranteed issue policy, you won't be asked to undergo an exam or complete a questionnaire — no medical information is needed to qualify for approval. These policies typically offer lower coverage levels than other types, and premiums tend to be higher because the insurance company has to assume that there’s a high risk to providing coverage.

8. Group life insurance

This is life insurance that you buy as part of a group — typically through your company or a membership organization. Most group life insurance is term, but some companies offer permanent coverage as a voluntary (employee-paid) benefit.

These plans offer relatively affordable premiums because the company or organization is effectively “buying in bulk.” Some employers even provide workers with term coverage equal to 1x their salary at no cost to the employee. Group policies may also be a simplified issue, at least for lower coverage amounts, which helps employees with health issues obtain coverage. On the other hand, coverage amounts can be limited.

Group life may not provide the comprehensive coverage you want, but it can be an easy, cost-effective way to start or supplement your life insurance protection. If available, find out if the policy is “portable”: if you leave your job, you can take your coverage with you.

Comparing costs of life insurance policies

To get an exact quote, you’ll need to contact a life insurance provider. However, this section will provide some idea of what prices you might expect to see.

Average annual cost of a $500,000 20-year TERM LIFE INSURANCE policy

^{Source: Nerdwallet May 2025}

Average annual cost of a $500,000 WHOLE LIFE INSURANCE policy

^{Source: Nerdwallet May 2025}

The costs featured above are averages. Please remember that many factors can influence your life insurance costs, including: your age; your gender; your status as a smoker or non-smoker;

your health and health history, your family medical history, your driving record, your occupation, and your lifestyle.

Whole Life Insurance vs. Term Life Insurance

As you can see, annual premiums for whole life policies are substantially higher than term life. Here’s why:

• The policy length: A whole life policy lasts your entire life, while a term policy only provides coverage for a limited number of years. With whole life, your beneficiaries are guaranteed to receive a death benefit regardless of when you pass. With term life, once the term expires, your beneficiaries are no longer entitled to a death benefit.

• The cash value: A term policy has no value once it expires. A whole life policy accumulates cash value, making it a lifelong asset that can help you meet financial goals up to and after retirement.

How to choose the right policy for you

Before making your final decision, speak to a financial professional or insurance agent about all the various life insurance plans and consider:

1. What length of time do you need coverage for?

   Term life will cover you for a certain period of time (typically 10, 20, or 30 years), while whole life will cover you for your entire life (so long as premiums are paid).

2. How much coverage do you need?

   Regardless of the type of policy, you’ll also need to choose the coverage amount. Death benefits can range from as little as $10,000 to $1 million or even more — and the benefit amount will substantially affect your premiums.

3. Are you interested in growing your wealth?

   In addition to the death benefit, certain forms of life insurance offer a cash value component that will grow your money in a tax-deferred manner.

4. How much coverage can you afford?

   You’ll need to know how much you can afford for monthly premiums.

Once you’ve made a decision, remember: No matter what kind of policy you get, make sure to get it from an experienced insurer that’s financially strong. After all, one of the main benefits of having life insurance is that it helps provide a level of certainty in a world that is anything but. Financial strength ratings are an objective way to gain assurance that the company will be there for your family, many years down the road.¹³