A life insurance policy pays money to the people you choose, called beneficiaries, when you die. That simple idea comes in several forms with very different costs. Understanding the main policy types, and how much coverage you need, helps you protect your family without paying for features you will not use.
Term life covers a set number of years and is the most affordable.
Permanent life (whole and universal) lasts for life and builds cash value, but costs much more.
Most families with a mortgage and young children are well served by term coverage.
Term life insurance
Term life covers you for a fixed period, commonly 10, 20 or 30 years. If you die during the term, your beneficiaries receive the death benefit. If you outlive it, the coverage ends with no payout. Because it has no savings component, term is typically the cheapest way to get a large amount of coverage. Read our detailed guide to term life insurance.
Permanent life insurance
Whole life
Whole life lasts your entire life as long as premiums are paid. Premiums are fixed, the death benefit is guaranteed, and part of each premium builds cash value that grows at a guaranteed rate. You can borrow against the cash value. It costs considerably more than term for the same death benefit.
Universal life
Universal life also lasts for life but offers flexible premiums and an adjustable death benefit. Cash value grows based on interest rates set by the insurer. Variations include indexed universal life (tied to a market index) and variable universal life (invested in sub-accounts, with market risk). These are more complex, and if the cash value runs low, the policy can lapse unless you pay more.
Comparing the main types
Term
Whole
Universal
Length
Fixed term
Lifetime
Lifetime (if funded)
Cost
Lowest
Highest
Varies
Cash value
No
Yes, guaranteed growth
Yes, variable growth
Premiums
Fixed for the term
Fixed
Flexible
How much life insurance do you need?
A common starting point is to add up:
Several years of income your family would need to replace
Your mortgage and other debts
Future costs such as children’s education
Final expenses
Then subtract savings and any existing coverage, such as a policy through work. Group life insurance from an employer is often a small multiple of salary and usually ends if you leave the job, so many people buy an individual policy too.
Key parts of a policy
Death benefit: the amount paid to beneficiaries.
Beneficiaries: primary and contingent (backup) recipients.
Riders: add-ons such as waiver of premium, accelerated death benefit or child term riders.
Contestability period: usually the first two years, during which the insurer can review misstatements on your application.
In the U.S., death benefits paid to a named beneficiary are generally not subject to federal income tax, though there are exceptions. Ask a tax professional about your situation.
Is whole life a good investment?
For most people, buying term and investing the difference is simpler and cheaper. Whole life can make sense for specific estate planning or lifelong dependents.
This article is general information, not financial, tax or insurance advice.
