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Life insurance is a super important part of protecting your family with a long-term financial plan in case anything happens to you. The purpose of life insurance is to replace your income for your family if you die. I get it—no one wants to think about dying—but just like a fender bender or a flood, it’s good to be prepared before it happens.
I’m going to keep it simple and take you through the most common types of life insurance policies to help you find the right one for you.
Here’s a list of the different types of life insurance:
Different Types of Life Insurance
- Term Life Insurance
- Permanent Life Insurance
- Whole Life Insurance
- Universal Life Insurance
- Variable Universal Life Insurance
- Indexed Universal Life Insurance
- No Medical Exam Insurance
- Simplified Issue Life Insurance
- Guaranteed Issue Life Insurance
- Joint Life (First-to-Die) Insurance
- Survivorship (Second-to-Die) Life Insurance
- Final Expense Insurance
- Decreasing Term Life: Mortgage Life and Credit Life Insurance
- Accidental Death and Dismemberment Insurance
- Group Life Insurance
Term Life Insurance
How it works: Term life insurance is the simplest type of life insurance you can buy because it does one thing: When you die, your spouse, children or other beneficiaries receive a fixed amount of money to replace your income.
Compare Term Life Insurance Quotes
With term life, you pay the insurance company to take on the financial risk of your death during the period (or term) of your policy. Typical terms are 10, 15, 20 or 30 years. So, if you buy a 15-year term life policy with $500,000 in coverage, you’ll make a monthly payment for 15 years. If you die during those 15 years, the insurance company will write your family a check for $500,000, also known as the death benefit. It’s that simple.
While a term life policy doesn’t have any monetary value unless you die during your term, it does bring you peace of mind knowing your family will be taken care of if something happens to you. The bottom line is, it’s a way to proactively take care of your loved ones so they don’t have to worry about money when you’re gone.
Pros: Term life is usually the most affordable type of life insurance. I recommend you purchase a term life insurance policy worth 10–12 times your annual income. That way, your family can invest the payout and live off the growth of that investment, permanently replacing your income if anything happens to you. This is the most cost-effective and affordable way to protect your family long term.
Cons: Term life only pays benefits if you die. Think of term life like your car insurance. Every six months (or maybe every month), you pay your insurance company to cover a claim if you get in a fender bender. But if you don’t have a wreck, you don’t expect a refund on your premiums.
Learn more about term life insurance.
Permanent Life Insurance
There are two main kinds of life insurance: term life and permanent life insurance. (We’ll look at a few other varieties later.) Permanent life insurance lasts your whole life. And most permanent life insurance policies include a cash value component. Think of cash value life insurance as a savings account you’re depositing money into every month. It’s a pool of money you own and can access or borrow against. The longer you have the policy, the more cash value the policy has.
Even though the different forms of permanent life insurance are way more expensive and confusing than term life, they’re still popular. But I don’t want you to rush into a policy just because it’s too confusing to fully understand what you’re signing up for. That’s why I’m here to explain the pros and cons of different types of life insurance.
Let’s talk through the types of permanent life insurance.
Whole Life Insurance
How it works: With whole life insurance, you buy a policy and lock in the premium and benefit amount for your whole life. And each month when you pay your premium to the insurance company, a portion of that premium goes into a cash value account that grows during the life of the policy. When you die, your beneficiaries get the death benefit.
Pros: Whole life covers you for your whole life. The policy stays in effect until you die or stop paying your premium.
Cons: Whole life is a rip-off, simple as that. Life insurance has one job: to pay your beneficiaries if you die. Whole life is expensive because you pay for it for your whole life, but you probably don’t need the policy for your whole life. And because part of your premium is used to grow your cash value, you’re paying more for less insurance. That sucks.
Whole life policies also don’t gain as much cash value as that extra amount you’re paying would if it were invested in a good mutual fund. Does it make sense to spend more money for less coverage and a bad long-term investment? (That was rhetorical. The only answer is: nope.)
One more note: When you die, your beneficiares receive the death benefit. But what happens to the cash value you built up over all those years? Well, if you didn’t use it while you were alive—it’s gone. That’s right. The insurance company keeps any remaining cash value. Like we said—total rip-off.
In addition to whole life, permanent life insurance policies can also include universal life, indexed universal life, or variable universal life.
Learn more about whole life insurance.
Universal Life Insurance
How it works: Universal life insurance has a death benefit and a cash value that earns interest. They also offer flexible premiums—meaning you could potentially access some of the cash value to cover part or all of your premium payment. Are you following? Because these are some major mental gymnastics happening when it comes to purchasing what you actually need.
Pros: Flexible premiums are helpful if money is tight and you need some money to cover an emergency expense.
Cons: Universal life is expensive. Basically, part of the monthly premium of a universal life policy goes toward the death benefit and another part is invested as “savings.” The thought is that the investment will grow with time—and maybe even enough to offset the premiums altogether.
I know these perks (death benefit, cash value and interest, oh my!) sound like an amazing option, but in reality this is a terrible investment strategy. Universal life policies have super high management fees and low returns on the cash value.
Find out more about universal life insurance.
Variable Universal Life Insurance
How it works: Variable universal life is a mix of a life insurance policy, a savings account, and a mutual fund.
Variable universal life insurance lets you decide how your cash value is invested. You choose from a variety of investment options for your cash value, and you get to pick how risky you are with those investments. That’s the “variable” part.
Pros: You’re in control of where your money is invested. But remember that insurance is about risk and who assumes the risk. So, you bear the risk of your investments—not the insurance company.
Cons: Variable universal life policies are expensive and have no guarantees when it comes to their cash value. They’re one of the worst life insurance options on the market because of the high management fees. (Are you seeing a fee trend here?) Again, you’d be better off getting a much more afforable term life policy and putting that extra hard-earned money in mutual fund investments.
Learn more about variable life insurance.
Indexed Universal Life Insurance
How it works: Indexed universal life (IUL) plans include both a cash value portion and a life insurance portion with a death benefit. The key difference here is that the cash value portion tracks an index fund. (An index fund is a type of mutual fund designed to mirror the performance of the stock market or a particular area of the stock market.)
Pros: If the stock market does well, the cash value will go up.
Cons: The rate of return will always be a little lower than the performance of the index fund because the insurance company will take their hefty share. And what if the market isn’t doing well? The cash value portion of your IUL policy will drop too. Gasp! Shocking, I know. And this unpredictability means sometimes you could pay way more for your premiums, and other times, you could pay less. Avoid this one like one-ply toilet paper.
Learn more about indexed universal life.
No Medical Exam Insurance
How it works: Applying for either a term or whole life policy in the past was like trying out for a sports team. (Not that I know from personal experience . . . I was less athlete and more mathlete back in the day.) You had to get a complete medical screening just to get started. But due to recent market changes, no medical exam policies and touchless exams are the new norm. There are two sub-types of life insurance without a medical exam:
- Simplified issue life insurance: These policies don’t require a medical exam, but they do require applicants to answer a health questionnaire. Some examples of questions they might ask are if you smoke, if you or a family member have ever had a chronic condition, etc. (P.S. I shouldn’t have to say this, but never lie on these questionnaires. That’s quite literally insurance fraud and could result in policy cancellation, claim denial, or an inability to get insurance with another company.)
- Guaranteed issue life insurance: Guaranteed issue has even fewer strings attached than the simplified policy—you don’t even have to answer any questions about your health! Many companies limit this type of coverage to people who are at least 40 years old, and some companies don’t offer it to those over 80. But if you’re in that age range, you’ll probably qualify. One drawback here is if you pass away within the initial waiting period before benefits kick in, your beneficiaries won’t get the death benefit.
Pros: A no medical exam policy means you won’t have to get a blood draw or have a physical. Guaranteed issue policies allow those who’ve been declined for other kinds of life insurance due to health issues to get enough life insurance to cover funeral expenses.
Cons: A no medical exam policy is usually more expensive than a comparable term life policy with a medical exam. Guaranteed issue life insurance has a waiting period and the death benefit basically just covers funeral expenses.
Learn more about no medical exam policies.
Joint Life (First-to-Die) Insurance
How it works: Joint life insurance, also called first-to-die insurance (how . . . romantic?) is a cash value policy marketed to couples who want to share a policy between them. Think of joint life insurance policies as the joint checking account of the life insurance world. The policy covers two individuals for one fee. These policies pay a death benefit as soon as the first spouse dies.
Pros: You only pay a single premium.
Cons: If your finances are like most families, one spouse makes more than the other—sometimes a lot more. Remember, the job of life insurance is to replace someone’s income when they die. Joint life insurance takes a one-size-fits-all approach and pays out the same exact benefit to either spouse. (And as a small-framed fella, I know more than most that one size does not, in fact, fit all.)
That means you could be paying a lot more to insure your spouse’s part-time income from the local fabric store than you would if you were to simply buy two term life policies. A joint life policy doesn’t make a whole lot of sense when you weigh the costs.
And if a couple dies at the same time in some kind of tragic accident? Well, the death benefit goes to their heirs.
Survivorship (Second-to-Die) Life Insurance
How it works: A survivorship life policy, which is also a type of cash value policy, pays absolutely zero benefit to anyone until both spouses die. Then, it pays your kids.
Pros: Survivorship policies are mostly geared toward wealthy people wanting to avoid large estate taxes on what they leave behind. They aren’t intended to support your spouse because by that point, you’ll both be in the great beyond.
Cons: If joint life insurance policies don’t make much sense, then survivorship or second-to-die life insurance policies are a complete waste of your money. We recommend you avoid survivorship life policies altogether because your spouse isn’t covered when you die. So, as with all cash value policies, I’m going to beat the dead horse (hopefully it had life insurance) once again: You and your spouse are better off getting a term life policy at a much lower cost and then investing in a good mutual fund instead.
Final Expense Insurance
How it works: Final expense insurance (or burial insurance) is a type of cash value insurance that covers your funeral expenses when you die.
Pros: It’s relatively inexpensive and saves your loved ones the cost of paying for your funeral.
Cons: Flashy advertisements will make you think you’re sparing your family the burden of paying for your funeral. It’s all about peace of mind knowing your funeral expenses are covered before you die.
But burial insurance is a completely emotional purchase that makes absolutely no sense financially. You can easily plan to pay for your funeral by setting aside $50 a month every month starting at age 55.
Let’s say you live to the ripe age of 77 years old (the average lifespan in America).1 That’s 22 years of socking away $50 a month—more than $13,000—assuming you don’t invest that money. If you invest it with an average return of 10% a year, you’ll have saved almost $50,000. Since the median cost of a funeral is around $7,800, why not just save up the money to pay for your own funeral and tell the insurance company to take a hike?2
Learn more about final expense insurance.
Decreasing Term Life: Mortgage Life and Credit Life Insurance
How it works: With decreasing term life insurance, as you pay your debts down, your death benefit goes down too. Examples of this type of insurance include mortgage life and credit life insurance. In these examples, the death benefit is designed to pay off your debt when you die. So, the higher your debt, the higher your death benefit to pay off your loans. The lower your debt, the lower your death benefit.
Pros: It pays off your debts when you die, which may mean your family will get to keep more of your estate. The logic is that you don’t need as much of a death benefit if your debt—usually a mortgage—is lower.
Cons: Premiums usually don’t change, so you end up paying the same every month for a payout that gets lower over time (assuming you pay down your debt while you hold the policy). Your beneficiaries don’t get the full benefits of life insurance because the payout gets applied to your debt, and if you have no debt, there’s no payout. In other words, your beneficiaries would get zero. Nada. Zilch.
So, let’s go back and look at that $500,000 term life policy example I mentioned and apply it to real life. If you had a decreasing term life policy and died in the last month of the term, your family would get zero dollars. But if you had a regular term life policy, they would get $500,000.
So, here’s the question: If life insurance is about protecting your family’s long-term financial plan, how on earth can you plan for something you don’t know the value of? That’s the problem with decreasing term life policies. You never know how much the policy will be worth when you die, so they provide your family very little financial security.
Accidental Death and Dismemberment Insurance
How it works: An accidental death and dismemberment policy, or AD&D, is a policy that pays out if you die in an accident or lose a limb and can’t work. In the case of dismemberment, it pays a portion of the benefit. If you die in an accident, it pays the full death benefit.
Pros: These policies are pretty cheap—usually just a few bucks a paycheck.
Cons: Many AD&D policies won’t pay a death benefit if you die from a medical procedure, a health-related issue or a drug overdose. And as you get older, your chances of dying by accident are significantly reduced. That’s why an AD&D policy is no substitute for—wait for it—a term life policy.
Group Life Insurance
How it works: Group life insurance is bought by an organization or company—which explains the name group—and then offered as a benefit to its employees.
Pros: The good news is group life is usually free through your employer. It’s also another way to get life insurance without having to take a medical exam.
Cons: Unfortunately, the death benefit from basic group life insurance is nothing big. That’s because these plans typically only cover a few times your salary. Remember, I always recommend getting a life insurance policy that provides a benefit 10 to 12 times your annual income. And if you get a new job, you could lose your coverage the day you leave your company. The key takeway here is to always have a separate term life policy of your own in place regardless of what your employer offers.
Learn more about group life insurance.
How Much Life Insurance Should I Get?
I recommend carrying a term life insurance policy that covers 10 to 12 times your annual, pretax income. (To get an idea of what that number looks like for you, check out our term life calculator.)
For example, if you make $40,000, you should carry at least $400,000 in coverage. Why this much?
If your surviving spouse invests that $400,000, in good mutual funds within a non-retirement account, with an average 10–12% return, they could potentially peel off $40,000 a year from that investment to replace your income without ever cutting into the original $400,000 investment. (Shout-out to compound growth for that magic math!)
Keeping It Simple: Term Life Insurance Makes Sense
Life insurance should be simple. That’s why I recommend only purchasing a term life insurance policy. It’s straightforward, inexpensive and designed to do one thing over the long term: support your loved ones if you die. And as an added bonus, the death benefits of a term life insurance policy are almost always tax-free.
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No one wants to talk about it, but we have to. You need life insurance. When you’re gone, your loved ones will grieve. This is unavoidable. But leaving them penniless while grieving is avoidable. Make sure they’ll be financially secure no matter what.
Whether you’re in the market for a new life insurance policy or just wondering if you’re carrying the right kind of life insurance, I recommend RamseyTrusted provider Zander Insurance. Their insurance professionals will walk you through the process of securing a term life policy that fits your family’s needs. They shop across the top-rated companies to find you the best rates for the exact coverage you need. Start here to get your term life insurance quotes.
What type of life insurance should I get?
In a word (or two): term life! It’s the only way to go if you want to be smart, save money, and truly provide yourself and those you love with long-term peace of mind.
Here’s why I love term life insurance. Like I’ve been saying:
- It’s usually the lowest-cost type of life insurance you can buy.
- It does the one thing life insurance is supposed to do: replace your income when you’re gone.
- It’s a proactive way to take care of those you love today, so they don’t have a financial burden after you pass.
What type of life insurance offers cash value?
Most permanent life insurance policies offer cash value. Types of permanent life policies include whole life, universal life, variable universal life, and indexed universal life.
Can a senior get life insurance?
Even if you’re older, you can still get life insurance. Having life insurance is the best way to take care of your loved ones after you’re gone. I still recommend term life insurance if you’re into retirement age. (Unless you’re self-insured, which is the ultimate goal.) Signing up for insurance later in life might mean you’ll have a higher premium and a shorter term, but the peace of mind will be worth it.
How are life insurance companies rated?
Insurance companies are rated by a credit rating agency called AM Best that looks at factors like a company’s ability to pay claims. AM Best gives an insurance company a letter grade that can range from A++ all the way down to S (suspended).