Types of life insurance
There are different kinds of life insurance to suit people’s different needs. Find out what’s right for you.
There are many types of life insurance policies that can help protect your family, and they all fall into two main categories: term and permanent.
With a term life policy, you get coverage for a defined length of time (say, 10 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 coverage with a “cash value” component that can help with many objectives, like helping to build your retirement nest egg while providing protection for life and other financial benefits along the way. To help you decide which kind of protection will work best for you, here are some things you should know:
- The basic features of a life insurance policy
- The different kinds of policies you can buy
- How to take the next step
- 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.
The beneficiaries: The person or people who get the death benefit. It can all go to a single person (e.g., a surviving spouse), or it can be 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. In a term policy, it’s 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 funded properly to pay monthly expenses.
The premium: The monthly or yearly payments needed to keep the policy in effect.
The cash value: The policy’s investment component that builds over time and can be cashed out or borrowed against.1, 2 A term policy has no cash value.
Term life insurance
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, there’s no cash value to the policy. It’s designed solely to give your beneficiaries a payout if you die during the term.
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, 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 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, it’s until the kids are grown up, the house is paid off, and there’s some money that can serve as a safety net for the surviving spouse.
Whole life insurance
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.
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
- 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 live on in retirement.5
When you get a whole life policy from a mutual company, such as Guardian, your cash value can also earn annual dividends6. 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 a dividend to its qualified whole life policyholders 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 asset 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 a death benefit.
Universal life insurance
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. Paying in less could eventually result in the need to pay in higher amounts in later years to keep your coverage. This type of policy can adjust to your life circumstances while providing the same kind of cash value growth as whole life. Having another child, moving on to a different job, or taking out a loan to buy a business – all might be instances where a combination of security 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 or investment 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 plans 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 will likely be able to find greater value in a whole life, universal life, or term life policy.