What types of life insurance exist?

There are two types of life insurance products: term life insurance and permanent life insurance.

What is term life insurance?

Term life insurance pays out a benefit to your beneficiaries only if you die within a specified timeframe, usually 10, 20, or 30 years. This is the best option if you want to protection for the years that matter most (when you still have a mortgage & children in the house).

Family protection

Term life insurance is the simplest and most affordable form of life insurance. 

For 95% of young families, term is the way to go.  Having life insurance protection for longer than you actually need it for may not seem like such a bad thing. But why pay for something you don’t need? Term life insurance lets you pay for coverage only during the years when you’ll need it (most likely in your 30s, 40s and 50s).

But you might be asking yourself.. what happens when it expires?

After the term expires, you have a few options:

The most likely scenario is that you won’t need life insurance anymore (you are near retirement, your mortgage is almost paid off & your kids are out of the house!)  If this is you, you can let your policy expire and never look back.

If you still need insurance, you have two options.  If you are still pretty healthy, you just apply for a brand new policy (at higher rates).  If you’ve been diagnosed with a pretty severe illness, the good news is that you are still covered. That is because term insurance come with a pretty standard feature called “guaranteed renewability.” In other words, if you still need the insurance after the term expires (for example, 10 or 20 years down the road), you can renew the policy without having to show proof of new health conditions or go through additional medical underwriting. This provides you with some protection against getting sick because your renewal rates are guaranteed.

Want to learn more?  Read more on why term life insurance is the way to go for 90% of people.

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Get a term life insurance recommendation today.

What is permanent life insurance?

Permanent life insurance pays out a benefit to your beneficiaries no matter when you die.​ Permanent insurance is much more expensive. Why? Because it guarantees that your beneficiaries will receive your death benefit. You can die young or die old, and your insurance company will still pay out your benefit.

There are two main types of permanent life insurance: whole life insurance and universal life insurance.

What is whole life insurance?

Whole life insurance is a form of permanent life insurance. It includes a death benefit (just like a term life insurance policy does) and a cash surrender value. Before we explain what a cash surrender value is, let’s talk about premiums.

With a whole life insurance policy, the premiums you pay during the early years are usually higher than the amount needed to cover the risk of your death. These “excess premiums” form the policy’s cash surrender value.

In other words, your insurance company takes the amount of money that you’ve overpaid by during the early years and places it in a bank account with your name on it. Each year, the insurance company invests this money. This allows your account to accumulate interest, which increases your cash surrender value. As you get older, your probability of dying (and, therefore, the cost of your insurance) gets higher. (It’s no secret that you aren’t going to live forever).

When you reach a certain age, the premium you pay for your policy won’t be enough to cover the cost of your insurance. At this point, your insurance company will start pulling money out of your cash surrender value account to cover the difference.

This structure allows you to pay the same premiums every year throughout the policy, even though the cost of your insurance technically increases over time. If you decide to cancel your policy at any point, you’ll receive the cash surrender value of the policy (the amount of money that you previously overpaid by).

But be careful: cancelling a whole life insurance policy can come with penalties and additional charges (just like when you try to cancel your phone or cable plan).

These penalties and charges can significantly reduce the amount of money you get back.​

What is universal life insurance?

Although it can seem more complex, universal life insurance gives you more flexibility than whole life insurance policies do. It combines life insurance with tax-advantaged investing. Like with whole life insurance, part of your universal life insurance premium is used to cover your death benefit whereas the rest is invested.

The investments form the cash value of the policy. In this case, however, your insurance company gives you some flexibility to choose how and which funds you’d like to invest.

Universal life policies are expensive. That’s why in general, you should use them for a combination of life insurance protection and long-term savings needs.

Expect to have the policy for at least 10–15 years before you start to cash out or shift investments. And remember that the value of your universal life policy will depend on how well the stock markets perform. So if risk makes you weak in the knees and you want something that’s fairly predictable, this may not be the policy for you.

So which one makes sense for me?

For most young families, term is the way to go.  Having life insurance protection for longer than you actually need it for may not seem like such a bad thing. But why pay for something you don’t need? Term life insurance lets you pay for coverage only during the years when it really matters (when your mortgage is at its highest & you have young kids).

If you’d like to read up on why we almost always recommend term life insurance to our customers, start here.

Get your free personalized life insurance recommendation today.
Pregnant couple

When is the best time to get life insurance?

The best time to get life insurance is when someone depends on you. For most people, this is when they get married or when they start having kids.

We know what you’re thinking: “But I just got a mortgage, and having kids isn’t cheap! How am I supposed to afford life insurance?”

Fortunately, the younger you are, the more affordable your life insurance will probably be. In most cases, it’s smart to lock in a low monthly rate when you’re young because it’ll stay at that price for the entire term of your policy.