Types of life insurance policies — and how to choose the right one
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There are many types of life insurance policies that can help protect your family, but they all fall into two main categories: term and permanent.
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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) provides life-long death benefit
coverage and also includes a “cash value” component that can help build family wealth,
supplement your retirement, and offer other financial benefits while you’re still
alive.1,2 To help decide which is best for you, here’s what you should know:
The different kinds of policies you can buy including:
Term life insurance
Whole life insurance
Universal life insurance
Final expense insurance
Simplified issue and guaranteed issue life insurance
Group life insurance
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 beneficiary(ies): The person(s) who get the death benefit. It can all go to a single person (e.g., a surviving spouse) or 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 adequately funded 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 be cashed
out or borrowed against.4,5 A term policy has no cash value.
The different types of life insurance policies and their key features
Policy type | Coverage length | Builds cash value? | How cash value grows | Death benefit | Medical exam? |
|---|---|---|---|---|---|
Term | Predefined: Typically 10, 15, 20, or 30 years | No | N/a | Fixed | Varies |
Whole | Lifelong | Yes | Fixed | Fixed | Yes |
Universal | Lifelong | Yes | Tied to market rates | Flexible | Yes |
Variable | Lifelong | Yes | Tied to your investment choices | Flexible | Yes |
Final expense | Lifelong | Yes, but very limited | Fixed | Fixed, but relatively low | No |
Term life insurance
Best for: Cost-effective, temporary coverage
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.
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.
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, typically 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 likely 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, 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.
Whole life insurance
Best for: Lifelong protection and guaranteed cash value
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 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 supplement your retirement.7
When you get a whole life policy from a mutual company, such as Guardian, your cash value can earn annual dividends.8 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 whole life policyholders a dividend 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 policy 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 death benefits.
Universal life insurance
Best for: Covering end-of-life costs without a medical exam
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.9 Paying in less could eventually result in the need to pay in higher amounts in later years to keep your coverage. This policy can adjust to your life circumstances while providing cash value growth. Having another child, moving on to a different job, or taking out a loan to buy a business — might be instances where a combination of protection 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 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 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 may be able to find greater value in a whole life, universal life, or term life policy.
Simplified issue and guaranteed issue insurance
Best for: Insuring older applicants or those with health problems
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 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 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
Best for: Cost-effective coverage that’s easy to get
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.10 These plans offer relatively cost-effective 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, cost-effective 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.
Nontraditional types of life insurance
In addition to the standard life insurance policies mentioned above, there are also other offerings that may be less possible but are designed to provide protection in specific instances. These can include:
AD&D: Accidental death and dismemberment insurance pays benefits for different types of accidental injuries but also provides a payout if the insured dies in a covered accident.
Supplemental: Added life insurance you buy at your expense to supplement other coverage, such as that offered by your employer.
Decreasing term: The death benefit in this type of policy decreases over time, providing a more cost-effective option for those who expect to have fewer financial obligations in the future.
Mortgage life insurance: A type of life insurance coverage that will pay off a mortgage after death.
Credit life insurance: Similar to mortgage insurance, but can also cover other large payoffs, such as a credit card balance or car loan.
Joint life insurance: A life insurance policy that covers two people (typically spouses). It can be structured to pay a benefit to the second spouse after the first spouse dies, or it can pay the couple's beneficiaries after both pass away a benefit, which may be called a Survivorship policy.
How to choose the right policy for you
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.11
Now that you know the 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 you should consider and how it can be tailored to your needs with riders — optional features that provide added coverage benefits.12 Or, if a traditional term, whole life, or universal life insurance policy doesn’t work for you, they can tell you about other available alternatives. 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.