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Life insurance is a must for anyone who wants to leave behind a legacy for surviving loved ones, cover their future funeral costs, or use their policy as an investment. Which of the many types of life insurance policies to go for, however, will depend on your goals and budget.

There are two main types of life insurance options: term life and permanent life insurance. But there are several other subcategories under the permanent life insurance umbrella, including whole life and at least three different variations of universal life insurance.

As each of these options has unique benefits and drawbacks, it pays to understand how they differ and who may benefit from them.

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Term Life Insurance

Term life insurance is the most affordable life insurance policy available as well as the easiest one to understand. This product is ideal for people with temporary financial obligations who want coverage for a specified period or “term.” Term lengths vary but can span anywhere from one year (annually renewable policies) to 30 years.

Unlike permanent life insurance, which has other uses, the sole value of term life is the death benefit. If the policyholder is still alive once the policy reaches its term — whether that be 10, 20, or 30 years — the policy will expire unless it features a conversion option that allows policyholders to convert the policy into a permanent one.

While a death benefit is not guaranteed under term life, the appeal of this type of policy is that premiums can cost as little as $35 a month, and coverage amounts can go up into the millions.

Is Term Life Right for Me?

Many term life insurance policies feature the option to convert to permanent before the end of the term without requiring a medical exam, so they’re a great alternative for less affluent families whose financial situation may change down the road.

Some also purchase term life insurance along with whole life as a form of added financial protection for the years in which they might need additional income, such as the span of their mortgage or while their children are in school.

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Permanent Life Insurance

Unlike term life, permanent life insurance provides a guaranteed death benefit as well as a savings or investment component that accumulates cash value on a tax-deferred basis. The appeal of permanent life is that policyholders may borrow from the cash value component during their lifetime and even use those funds to cover premium payments. This flexibility makes permanent life policies much more expensive than term life policies.

One thing to keep in mind about permanent policies is that premium payments go toward funding the death benefit first, so it may take years to see cash value accumulation. Additionally, if you’ve borrowed funds from the account and there is an outstanding balance upon your death, the amount you owe will be deducted from the death benefit.

There are two main types of permanent life insurance: whole life and universal life. Whereas whole life provides fixed premiums and guarantees cash value accumulation, universal life features flexible death benefits and premiums.

Whole Life Insurance

Because whole life insurance features fixed premiums and death benefit amounts as well as a guaranteed cash value accumulation, it is the most expensive life insurance policy available. Some companies also pay out dividends on whole life policies, which can be used to cover premium payments or purchase additional coverage.

Is Whole Life Right for Me?

A whole life insurance policy can be an attractive option for those who can afford the policy and intend to use it to cover estate taxes for their heirs or ongoing care for disabled dependents.

Chris Huntley, life insurance consultant and founder of If You Build It, recommends whole life for those making over $60,000 a year. In his opinion, whole life insurance makes the most sense for wealthy individuals with complex estate situations, and only after they’ve exhausted other investment options such as 401k, IRA, and Roth IRA accounts.

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Universal Life Insurance

Universal life insurance is known to be the most flexible permanent life insurance option. It allows policyholders to pay premiums at any time and reduce or increase their death benefit, which can in turn lower or increase their premiums.

Because the cash value component of universal life policies is invested in stocks or bonds, it’s subject to market fluctuations. This means that in low-interest-rate environments, the cash value account won’t grow as intended and you won’t be able to cover future premiums with those funds.

Other policy types under the universal life insurance umbrella include:

  • Guaranteed: These policies have little to no cash value accumulation, but premiums are fixed and the death benefit is guaranteed.
  • Indexed: The cash value is invested in market indexes such as Nasdaq, S&P 500, and Dow Jones. Can have high policy fees and there is a cap on gains and losses.
  • Variable: The cash value is invested in sub-accounts that hold bonds or stocks. Entail more risk and require hands-on account management. Fees can be higher than for other universal life policies.

Is Universal Life Right for Me?

If you have a high risk tolerance and are willing to put in the time to understand and monitor your investments, a universal life policy may be a good fit. Because of the complexity of these products, we advise you to consult a financial planner before opting for universal life.

Life Insurance Policies Cheat Sheet

Go for it: Skip it:
If you just need to replace your income or cover debts for a specific period, such as the duration of your mortgage If you have a child or relative who will depend on you for the long term

Go for it: Skip it:
If you have a lot of disposable income and have exhausted other investment options If your financial situation is likely to change in the future

Go for it: Skip it:
If you want a fixed death benefit and premiums If you care about cash value accumulation

Go for it: Skip it:
If you want to adjust your premiums and coverage level as you see fit If you want a higher-yield investment option

Go for it: Skip it:
If you have a moderate risk tolerance and want higher gains from your cash value but with caps on gains and losses If you have a low risk tolerance

Go for it: Skip it:
If you want to invest your cash value component in high-risk, high-gain investment vehicles like bonds, stocks, and mutual funds If you have a moderate or low risk tolerance or don’t want to actively manage your account

FAQs About Life Insurance Policies

How much can a life insurance policy cost?

What you pay for your life insurance policy will depend on several factors, including the type of policy and coverage amount you choose as well as your personal details.

In general, term life insurance is the most affordable policy type with high coverage amounts. According to life insurance nonprofit Life Happens, a $250,000 level-term policy for a healthy 30-year-old can cost around $160 per year or just $13 a month. On the other hand, whole life can cost 5 to 10 times more than term life insurance.

Other factors that go into determining the cost of your policy have to do with the risk you pose to the insurance company. The higher your risk of passing away, the higher the premium:

  • Your age and health – Premiums increase as you age and develop health conditions.
  • Your gender – Females tend to outlive males, so their insurance premiums tend to be lower.
  • Your occupation and hobbies – Practicing extreme sports or having a high-risk job (drivers, pilots, roofers, etc.) will increase your premiums.
  • Your habits – If you’re a smoker or tobacco user, your premiums can cost about 25% more.

Which life insurance policy is right for me?

Some insurance agents may offer you life insurance policies based on what you can afford to pay as opposed to what you want or need from your life insurance. However, the type of policy and amount of coverage you go for should be based on your financial needs and plans.

A good rule of thumb is to go for term life insurance with a conversion option if you have a young family, temporary debt, and little disposable income. As your circumstances change and you exhaust other investment options, you may start considering permanent life insurance.

Remember that while permanent life insurance guarantees a death benefit, premiums are more expensive. This means that if your finances take a turn for the worse and you can’t afford your premiums, your life insurance policy could lapse.

How much life insurance coverage do I need?

Some experts recommend you purchase 10 to 15 times your gross incomes in life insurance coverage, as the amount of money the policy would pay out could be enough to cover final expenses and other needs your family members may have for some time after your death. However, this doesn’t take into account factors such as inflation, the cost of services you provide for your family, or benefits you may have through your employer, which could deplete the death benefit sooner than you planned.

To best determine a coverage amount that takes into account your full financial picture, consult a professional, such as a financial advisor or certified financial planner.

Can I get a life insurance policy without a medical exam?

Some whole life insurance products, such as guaranteed issue or simplified issue life insurance don’t require a medical examination. Guaranteed issue life insurance is typically marketed to older adults with pre-existing health conditions. These policies don’t require a medical questionnaire and feature guaranteed approval, but tend to be costlier for the coverage amounts they offer (up to $25,000).

Simplified issue life insurance, on the other hand, does require a medical questionnaire, and approval is not guaranteed, but the application process is quicker. Coverage amounts for simplified issue policies typically go up to $50,000, but some insurers won’t pay out if you die within two years of purchasing the policy.

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How do annuities compare to life insurance?

Annuities are sold by life insurance companies as a tax-deferred investment option. Unlike life insurance, which aims to provide the policyholder’s beneficiaries with supplemental income through a death benefit, the main purpose of annuities is to provide the buyer with an income stream upon their retirement.

Like life insurance, there are different types of annuities: fixed, variable, and indexed, which determine the investment account’s rate of return and the risk the investment entails. There are also high fees associated with annuity contracts, which can make these products just as expensive as whole life insurance. Again, consult a certified financial planner to determine whether an annuity might be right for you.

Life Insurance Policies in a Nutshell

Life insurance can serve many purposes, from covering future funeral expenses and replacing your income for your dependents, to investing in the market or leaving behind a legacy. The best life insurance policy for your needs will then depend on what you want the policy to do and how much you can afford to pay on premiums.

A simple product like term life insurance can be a great choice for most, while permanent life can be a good fit for those with sufficient disposable income who want to use their life insurance policy as an investment.

And when shopping around for a permanent life insurance policy your choice should come down to your budget, the level of payment flexibility you’re looking for, your risk tolerance, and the time you are willing to spend managing your policy.

Before choosing a policy, get life insurance quotes from the best life insurance companies of the year.

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More from Money

Guide to Term Life Insurance

Guide to Whole Life Insurance

Guide to Universal Life Insurance

Guide to Life Insurance for Seniors

Advertiser Disclosure

The purpose of this disclosure is to explain how we make money without charging you for our content.

Our mission is to help people at any stage of life make smart financial decisions through research, reporting, reviews, recommendations, and tools.

Earning your trust is essential to our success, and we believe transparency is critical to creating that trust. To that end, you should know that many or all of the companies featured here are partners who advertise with us.

Our content is free because our partners pay us a referral fee if you click on links or call any of the phone numbers on our site. If you choose to interact with the content on our site, we will likely receive compensation. If you don't, we will not be compensated. Ultimately the choice is yours.

Opinions are our own and our editors and staff writers are instructed to maintain editorial integrity, but compensation along with in-depth research will determine where, how, and in what order they appear on the page.

To find out more about our editorial process and how we make money, click here.

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