The different types of life insurance: which is best for me?

3 mins readLast updated February 7, 2024by Kate Morgan

There are many types of life insurance available, but which is the best option? Explore all the details of the different types of life insurance here.

With a million different types of life insurance available in the US, where should you start?

This article gives you a rundown of how life insurance works in America, details your options, and explains the pros and cons of each one.

Read on, and you'll learn everything you need to know to choose the life insurance policy that works best for you.

How does life insurance work?

When you have life insurance, you pay a premium monthly or annually.

In return for your payments, your family receives a “payout” or “death benefit” when you pass away.

This money can be used for any purpose – paying off debts, household costs, funeral costs, supporting children through college etc. 

A total of 75 per cent of adults in America have life insurance, an essential investment if you wish to provide for your beneficiaries in the event of your death.

Many find that when they finally take that step and secure some insurance, it’s not nearly as costly as they’ve anticipated – the average adult in 2022 pays $45 to $55 per month (though the exact amount depends on several factors, from coverage level to health details).  

What are the different types of life insurance?

A common question among people searching for the right life insurance policy is “What types of life insurance are there?”

In a 2022 survey, 65 per cent of Americans agreed that they didn’t know how to buy a life insurance policy and didn’t know which life insurance would be best for them

There are nine main types of life insurance policy.

They all fall under the banner of either “term” or “permanent” policies. As the name suggests, permanent policies (like whole life insurance and universal life insurance) are lifelong.

Term policies (like mortgage life insurance and supplemental life insurance) can last between five and 30 years and are usually cheaper but less comprehensive.

Different policies contain add-ons or specifications, but for the most part, the choices are: 

  1. Whole life insurance – A permanent insurance policy that will cover you for the whole of your life. One of the main benefits of whole life insurance is that it builds cash value, and plans often come with a guarantee that premiums won’t increase. Unfortunately, whole life insurance is only accessible to wealthy people and is easily the most expensive type. 

  2. Term life insurance – A term life insurance policy is best suited to people who want to cover a specific debt or situation quickly. Since it covers less time and specifies a defined period, it’s the cheapest type of life insurance and works for most people. The average 50-year-old non-smoker would expect to pay around $118 monthly. Term life insurance can, however, be costly to renew, and you won’t receive any money if you outlive your policy.  

  3. Universal life insurance – A universal life insurance policy is cheaper and more flexible than many other types of life insurance, as you can choose the age you’d like the benefit to be guaranteed until. Unlike other types of insurance, though, this policy comes with no cash value, and not paying on time often means losing the policy altogether. 

  4. Variable life insurance – A variable life insurance policy lets you choose accounts to invest your money in, and in turn, you can generate cash value. This type of policy lets you take an active role in the process, investing where you see fit. As you may know, the bond markets can be volatile, so there’s a high level of risk associated with this kind of insurance. Make a bad investment and lose money, and you’ll reduce your “death benefit.” 

  5. Burial and funeral insurance – Also known as “final expense insurance,” this policy covers funerals and end-of-life expenses. It’s a good option for people in poor health who can’t afford another type, but it’s usually still quite expensive. And if you pass away within two to three years of buying the policy, your beneficiaries won’t receive a payout.  

  6. Survivorship life insurance – Survivorship life insurance is often the best option for couples, as it enables you to insure two people through one policy. It’s important to note that the “second to die” nature of the policy means that the money only becomes available when both insured parties die. It’s suitable for funding trusts for beneficiaries, usually children, but if one party dies, the surviving party will not necessarily receive any benefits. 

  7. Mortgage life insurance – This is a policy with a simple and singular use. It allows your family to pay off your mortgage after you pass away. Because the benefit is paid to the mortgage lender rather than your beneficiaries, it won’t provide them with any direct financial assistance – but it will rid them of a potential financial burden. 

  8. Credit life insurance – A credit life insurance policy is offered when you take out a loan. It gives a payout equal to the balance of the debt to the lender, so it’s a convenient option if your family would rather not be left on the hook for paying off your debts after your passing. Like mortgage life insurance, money will be paid directly to the lender rather than your beneficiaries, so they won’t benefit financially.  

  9. Supplemental life insurance – Also known as “group insurance,” a supplemental life insurance policy is provided by your employer. It’s usually free or cheap, offering you very good value for money. However, if you’re made unemployed at any point before your death, you’ll lose access to the policy.

Making the right life insurance decision

After you’ve fully explored what types of life insurance are available to you, you need to consider some other important factors before coming to your final policy decision.

Firstly, what do you want the policy to cover?  

Secondly, how do your age and health affect what you can expect your life insurance to cost? Like health insurance and long-term care insurance premiums, life insurance premiums increase as you get older. And the more health issues you have, the more you can expect to pay.  

Weigh everything you know about your lifestyle, health, and goals against what you’ve learned about life insurance, and you’ll be able to decide on the best plan for you.

It might take some time, but it’s worth getting right.  

Content writer

Kate Morgan

Kate has written for leading publications and blue chip companies over the last 20 years.