With a term life policy, you get coverage for a defined length of time (say, 10 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) provides life-long coverage with 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. To help you decide which kind of protection will work best for you, here are some things you should know:

  • The basic features of a life insurance policy
  • The different kinds of policies you can buy
  • How to take the next step

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.
  • 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 it can 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. In a term policy, it’s 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 investment component that builds over time and can be cashed out or borrowed against.1, 2 A term policy has no cash value.

The different types of life insurance policies and their key features

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, there’s no cash value to the policy. 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 term life 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 the coverage level you want. How many years will your family need financial protection? For most people, it’s until the kids are grown up, the house is paid off, and there’s some money that can serve as a safety net for the surviving spouse.

Whole life insurance

A whole life policy is the simplest form of permanent life insurance, 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 coverage, a whole life policy has three defining characteristics:

  • The level premium remains the same for life
  • The death benefit is guaranteed as long as the guaranteed premiums are paid4
  • 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.5

When you get a whole life policy from a mutual company, such as Guardian, your cash value can also earn annual dividends6. 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 a dividend to its qualified whole life policyholders every year since 1868.

Whole Life vs. Term Life Insurance

Key differences between term and whole life insurance include:

  • The policy length: A whole life policy lasts your entire life, while a term policy only provides coverage for a limited number of years. 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 is a life-long asset that can be accessed to help meet financial goals up to and after retirement.
  • The premium: For a given death benefit – e.g., $100,000 – premiums will be higher for whole life, along with the certainty that your beneficiaries will eventually be paid a death benefit.

Universal life insurance

A universal life policy is another form of permanent insurance that offers the cash value and lifetime coverage benefits of whole life. But there’s a fundamental difference compared to whole life: the premiums are flexible.

With a universal policy, you can raise or lower the amount you pay into the policy as you see fit, within the limits of the policy. Paying in less could eventually result in the need to pay in higher amounts in later years to keep your coverage. This type of policy can adjust to your life circumstances while providing the same kind of cash value growth as whole life. Having another child, moving on to a different job, or taking out a loan to buy a business  – all might be instances where a combination of security and flexibility becomes important.

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. The coverage is permanent in the sense that if you keep paying premiums, the policy will remain in effect, but there is no cash value or investment component to these policies. Older people often buy final expense coverage without dependent children because it helps protect loved ones who might otherwise have to cover these costs out-of-pocket. While the premiums for these plans tend to be modest, the death benefit is also very limited –  it’s not meant to provide years of financial support to your beneficiaries. Younger, healthier people who want to build cash value or a significant death benefit for their families will likely be able to find greater value in a whole life, universal life, or term life policy.

Simplified issue and guaranteed issue insurance

Most life insurance policies are underwritten: they 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 plans 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 levels of coverage compared to other types, and premiums tend to be higher because the insurance company has to assume that there’s a high risk to providing coverage.

Group life insurance

This is life insurance that you buy as part of a group – typically through work as part of your employee benefits package, or via a member organization. Most group life insurance is term, but some companies also offer permanent coverage as a voluntary (employee-paid) benefit.

Until recently, individual policies – bought through agents or directly from insurance companies – were the most common way to get life insurance. Now, more Americans are covered by employment-based group policies. 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 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, affordable way to start or supplement your life insurance protection. If available, find out if the policy is portable: that means that if you leave your job, you can take your coverage with you.

Life insurance really does protect the people you love. Just ask Joleen Mainz.

For Joleen Mainz, life insurance was a professional passion and a personal necessity. See how Joleen was able to recover from family tragedy and debilitating injury using the protection offered by her insurance policies.

Term life insurance calculator 

Figure out how much you may need and what it could cost

How to take the next step

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. Look for a company with a rating of at least “Superior” (A+) from A.M. Best, the insurance industry’s number one rating agency (Guardian is A++).7, 8

Now that you know basics, it’s time to talk things over with someone who can help you decide exactly which type of life insurance is right for you. As you’d expect, that will depend on your age, financial situation, family status, and a host of other factors.  A broker or financial professional can help you determine which type of policy is best, how it can be tailored to your needs, and which alternatives are available if a term, whole life, or universal life insurance doesn’t work for you. If you don’t have someone to discuss insurance with, Guardian can help you learn more about buying life insurance or even find a nearby financial professional who will listen to your needs and help guide you to the right solution.

Frequently asked questions about types of life insurance

What is permanent life insurance?

Permanent life insurance is life insurance that covers you for your entire life rather than a limited period, as with term life insurance. Whole life insurance and universal life insurance are two types of permanent life insurance that not only can cover you indefinitely, but also accumulate a cash value.

What is cash value life insurance?

Cash value life insurance is a permanent life insurance policy that builds a cash value that can be accessed during your lifetime for any reason. Both whole life insurance and universal life insurance are examples of cash value insurance.

What is variable universal life insurance?

Like universal life insurance, variable life is permanent insurance that lets you adjust your premium to account for changes in your income or expenses. The policy’s cash value is invested in underlying subaccounts and may increase or decrease based on the performance of those underlying investments. This flexibility – and variability – means you should routinely review your policy to avoid a policy lapse, especially when market conditions change.

What is group life insurance?

Group life insurance is a life insurance policy you buy at a group rate, usually through your employer. If your employer doesn’t offer life insurance, you can buy your own individual life insurance policy.

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1If the policy is cashed out, taxes may be due on any gain that the policy may have.

2Policy benefits are reduced by any outstanding loans and loan interest. Dividends, if any, are affected by policy loans and loan interest. If the policy lapses, or is surrendered, any loans considered gain in the policy may be subject to ordinary income taxes. If the policy is a Modified Endowment Contract (MEC), loans are treated like withdrawals, but as gain first, subject to ordinary income taxes. If the policy owner is under 59 ½, any taxable distribution from the policy may also be subject to a 10% federal tax penalty.

3Guardian, its subsidiaries, agents and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation.

4All whole life insurance policy guarantees are subject to the timely payment of all required premiums and the claims paying ability of the issuing insurance company. Policy loans and withdrawals affect the guarantees by reducing the policy’s death benefit and cash values.

5Policy benefits are reduced by any withdrawals/surrenders. Withdrawals/surrenders above the cost basis may result in taxable ordinary income. If the policy lapses, any cash value considered gain in the policy may be subject to ordinary income tax. If the policy is a Modified Endowment Contract (MEC), withdrawals are distributed as gain first and subject to ordinary income taxes. If the policy owner is under 59 ½, any taxable withdrawal may also be subject to a 10% tax penalty.

6Dividends are not guaranteed. They are declared annually by Guardian’s Board of Directors.

7Ratings are as of May 31, 2020 and are subject to change.

8Financial information concerning Guardian as of December 31, 2019, on a statutory basis: Admitted Assets = $62.2 Billion; Liabilities = $54.6 Billion (including $46.5 Billion of Reserves); and Surplus = $7.6 Billion.

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