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Lisa McArdle is an insurance editor who joined the Bankrate team in 2023. She has more than 15 years of experience writing, editing and managing content in a variety of industries, including insurance, auto news and pop culture.
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Life insurance may be a good option to help support your family after you pass away. A life insurance policy enables you to assign beneficiaries to a death benefit. Your beneficiaries can use this benefit to pay bills, cover funeral expenses, pay tuition and more. But with the different types of life insurance policies available, how do you know which is right for you? Bankrate’s team of insurance experts breaks down the basics with this life insurance guide, highlighting the differences between the types of policies available.
Life insurance is a policy between you and your insurance provider. Life insurance premiums are typically paid on a monthly, quarterly or annual basis. If you pass away while the policy is active and the terms of the policy have been met, your beneficiaries will receive a lump sum of money called a death benefit.
There are two main types of life insurance: permanent life insurance and term life insurance.
There are several different kinds of policies that exist under these categories. For instance, whole life insurance, universal life insurance, variable universal life insurance, indexed life insurance, guaranteed life insurance and final expense insurance are all types of permanent life insurance.
Permanent life insurance policies are active until the policyholder’s death as long as the terms of the life insurance agreement are met. In other words, they do not expire as long as the policyholder is still living and paying the premium.
Some types of permanent policies, such as whole life, have fixed premiums and death benefits. This means that the premiums you pay and the death benefit your beneficiaries receive after you pass never go up or down. Other types of permanent policies, such as universal, have flexible premiums and death benefits. This means you may be able to adjust your premium payment and death benefit at certain points in the policy term. Medical exams are typically required before permanent life insurance coverage is extended.
While life insurance policies do have certain exclusions, like suicide clauses or safeguards against those who are untruthful during the application process, your premium payments will typically mean that your beneficiaries receive a death benefit upon your passing, as long as the terms of the policy have been met.
Additionally, most permanent life insurance policies come with a cash value account that allows you to pay premiums and withdraw or borrow money against the policy once it has accumulated enough funds. However, the growth potential for some types of permanent life insurance policies may be minimal, while others come with inherent risk as their cash value is invested in the stock market (variable, for instance). For more information on cash value accounts, you may want to speak with a licensed insurance agent or financial expert.
Permanent life insurance policies could be ideal for those who want coverage without the concern of a policy expiration date. As permanent life insurance is generally more expensive than term, permanent policies might also be best for policyholders that are not on a strict budget.
Term life insurance policies last for a predetermined period of time, usually between 10 and 30 years, before expiring. The death benefit is fixed under some term policies, while it may decrease or increase under others as the policy ages. Premiums for term life insurance are usually, but not always, fixed. Also, a medical exam may or may not be required. Before you purchase a policy, you may want to ask an insurance agent about this. Unlike a permanent life insurance policy, a term life policy will not come with a cash value account.
As the name implies, term life insurance policies only pay out a death benefit if the policyholder dies, extends or converts their policy to a permanent policy before the end of the term. In other words, if the policyholder passes away after their policy term expires, then no death benefit will be paid.
Some term life policies are convertible by means of a conversion rider. A conversion rider is a policy endorsement that allows you to convert your term policy into a permanent policy before the term expires, and it typically comes at an additional cost. The conversion rider will sometimes waive any additional medical exams that would typically be required before permanent life insurance is extended. This is not an option offered by all insurance companies, so you may want to ask your agent if conversion is possible before purchasing your term coverage.
Term life insurance may be ideal for those who only want coverage for a certain period and are looking for a cheaper policy, as term policies are typically less expensive. For instance, family breadwinners may wish to purchase a term policy that is active while their children are young or during the years they still owe on their mortgage.
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