Types of Life Insurance Plans and How to Decide Which One Is Right for You

When you start looking into life insurance plans, there are two main types: term and permanent. Term life covers you for a limited period, while permanent can stay in place for the rest of your life. However, the options don’t stop there. Many other types of permanent life insurance cater to different needs and preferences. You can opt for whole life, universal life, variable life, and more.

With so many options, it can be hard to know which life insurance policy or life insurance company is best for your situation. To help, here’s a breakdown of the main types, how they work, and when each is generally a good fit. 

Term life insurance policies offer coverage that is limited to a set period—often 10, 20, or 30 years. You select a term and coverage amount and pay a monthly premium to keep coverage. If you pass away during the term in a way that doesn’t violate the contract, your beneficiary receives the plan’s death benefit. If you outlive the term, your coverage will end unless you opt for a renewal.

Features

• Coverage for a set number of years
• Pays death benefit to the beneficiary if you die during the term
• May have a renewal option

Pros

• Affordable premiums
• Premiums do not increase during the term
• Insurers may allow renewals

Cons

• Doesn’t last for life
• Renewals bring premium increases
• No cash value component 

Ideal for:

Term life insurance is typically best for those who need affordable coverage during a period when they have large financial responsibilities. In addition to a fixed death benefit, whole life policies come with a cash value savings component. Every time you make a premium payment, part of the payment goes toward your cash value. Interest then accrues on that money according to a fixed rate.

You can withdraw from or borrow against your cash value account during your life. However, that amount will be deducted from the death benefit your beneficiary receives. You could choose to pay back a cash value loan to return to the original death benefit.For example, if you’re the breadwinner of your family, you may want coverage while your children are growing up and you’re paying off your mortgage. 

Whole life insurance policies offer coverage for the rest of your life as long as you pay your premiums. They come with a fixed death benefit and a fixed monthly premium. Both are established when you initially sign up and stay the same as long as you keep the policy active. When you pass away, your death benefit gets paid out to your named beneficiary.

Features

• Permanent policy
• Cash value component, which can be used for loans, withdrawals, or to pay premiums
• Fixed premium and death benefit
• Guaranteed cash value growth

Pros

• Predictable premium payments
• Guaranteed death benefit amount
• Coverage for life
• Can borrow against or withdraw from cash value, or use it to pay premiums

Cons

• Initially, much more expensive than term life
• Cash value may grow slower than with other policies
• No flexibility to adjust the premium or the death benefit

Ideal for:

If you’re looking for a predictable and low-maintenance life insurance policy that’ll cover you for the rest of your life, whole insurance can be a good fit. It helps you leave behind a sizable amount of tax-free money to your loved ones and gives you access to money during your life. On the downside, it does initially come at a much higher cost than term life insurance. But the premiums will not increase as you get older, as they do with other types of insurance, including term insurance renewal.

Universal life insurance is another permanent policy that’s designed to cover you for the rest of your life, as long as you pay the premiums and don’t deplete your cash value.

Like whole life insurance, it has a cash value savings component. However, unlike whole life, your premium and death benefit won’t be fixed. You can adjust them up or down to better suit your budget throughout your lifetime.

You must pay enough to cover the policy’s underlying insurance cost though, which goes up as you get older. By design, you’re supposed to pay more than the insurance cost to build cash value when you’re younger so that it helps cover the rising insurance costs as you get older. Otherwise, your premiums will go up.