Life Insurance Types Explained
Life Insurance Made Simple In all its forms life insurance has one core benefit – it pays an income-tax-free death benefit directly to your beneficiary when you die. Life insurance also gives you options that can reduce taxes immediately, build tax-advantaged income for retirement and/or provide assets to offset estate taxes. The two major types…
- Life insurance basics
- Term insurance
- Cash value insurance
- Variable universal life
- Variable second-to-die
- Whole life
- Universal life
Life insurance basics
Life insurance pays a death benefit to your beneficiary tax-free. Depending on the type of policy, it can also reduce your current taxes, provide retirement income, or help cover estate taxes.
There are two main categories: term insurance and cash value insurance.
Term insurance covers you for a set period. Cash value insurance covers your lifetime and can build equity you can borrow against or withdraw.
Term insurance
Covers you for a specific time period (5, 10, 15 years, or longer).
Term insurance is cheaper than cash value coverage because you're only paying for protection during that period. When the term ends, so does your coverage—there's no remaining value. It's similar to renting rather than owning.
People typically buy term insurance to cover specific obligations: protecting young children until they're grown, covering a mortgage, or handling other short-term needs.
Cash value insurance
This covers you for life and builds cash value over time. You can borrow against it or withdraw it if you need money.
Four common types of cash value insurance:
Variable universal life
The investment portion fluctuates with the market (like a mutual fund), so returns are higher but riskier. This works best if you have many years until you'll need the money.
Variable second-to-die
This insures two lives and pays out after the second person dies. It's commonly used for estate planning because one policy for two people often costs less than two separate policies.
Whole life
Guarantees both your death benefit and cash value growth, though the cash value typically grows more slowly than variable options.
Universal life
Offers more flexibility than whole life with a fixed rate of return, for people who want growth without market risk.
Talk to a financial advisor about which type makes sense for your situation and how much coverage you need.
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