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If you love life as much as I do, you’re going to love life insurance! Life insurance is a super important part of protecting your family with a long-term financial plan in case anything happens to you. The purpose of life insurance is to replace your income for your family if you die. Harsh? I get it—no one wants to think about dying—but just like a fender bender or a flood, it’s good to be prepared before it happens.

There are two main kinds of life insurance: term life (which is the best) and permanent life insurance. (We’ll look at a few other varieties later.) Permanent life insurance lasts your whole life—which sounds good, but ends up being a really bad deal.

Even though the different forms of permanent life insurance are way more expensive and confusing than term life, they’re still popular. But I don’t want you to rush into a policy just because it’s too confusing to fully understand what you’re signing up for. That’s why I’m going to keep it simple and take you through the most common types of life insurance policies, with all the pros and cons, to help you find the right one for you.

Here’s a list of the different types of life insurance:

Different Types of Life Insurance

• Term Life Insurance
  • Level Term Life
  • Decreasing Term Life
• Whole Life Insurance (Permanent Life Insurance)
  • Universal Life Insurance
  • Variable Life Insurance
  • Variable Universal Life Insurance
  • Indexed Universal Life Insurance
  • Guaranteed Universal Life Insurance
  • Joint Life (First-to-Die) Insurance
  • Survivorship (Second-to-Die) Life Insurance
  • Final Expense Insurance
• No Medical Exam Insurance
• Simplified Issue Life Insurance
• Guaranteed Issue Life Insurance
• Accidental Death and Dismemberment Insurance
• Group Life Insurance

Term life insurance is the simplest type of life insurance you can buy because it does one thing: When you die, your spouse, children or other beneficiaries receive a fixed amount of money to replace your income.

A lot of times term life insurance is known as level term because the coverage amount stays the same level for the entire term of the policy. (There’s also term life insurance that decreases in payout—and I’ll talk about that a little later.) But level is way more common, so people tend to use the names level term and term life interchangeably.

How it works: With term life, you pay the insurance company to take on the financial risk of your death during the period (or term) of your policy. Typical terms are 10, 15, 20 or 30 years. So, if you buy a 15-year term life policy with $500,000 in coverage, you’ll make a monthly (or quarterly or annual) payment for 15 years. If you die during those 15 years, the insurance company will write your family a check for $500,000, also known as the death benefit. It’s that simple.

While a term life policy doesn’t have any monetary value unless you die during your term, it does bring you peace of mind knowing your family will be taken care of if something happens to you. The bottom line is, it’s a way to proactively take care of your loved ones so they don’t have to worry about money when you’re gone.

Compare Term Life Insurance Quotes 

Pros: Term life is usually the most affordable type of life insurance. I recommend you purchase a term life insurance policy worth 10–12 times your annual income. That way, your family can invest the payout and live off the growth of that investment, permanently replacing your income if anything happens to you. This is the most cost-effective and affordable way to protect your family long term.

Cons: Term life only pays benefits if you die. Think of term life like your car insurance. Every six months (or maybe every month), you pay your insurance company to cover a claim if you get in a fender bender. But if you don’t have a wreck, you don’t expect a refund on your premiums.

Learn more about level term life insurance.

How it works: With decreasing term life insurance, as you pay your debts down, your death benefit goes down too. Examples of this type of insurance include mortgage life and credit life insurance. In these examples, the death benefit is designed to pay off your debt when you die. So, the higher your debt, the higher your death benefit to pay off your loans. The lower your debt, the lower your death benefit.

Pros: It pays off your debts when you die, which may mean your family will get to keep more of your estate. The logic is you don’t need as much of a death benefit if your debt—usually a mortgage—is lower.

Cons: Premiums usually don’t change, so you end up paying the same every month for a payout that gets lower over time (assuming you pay down your debt while you hold the policy). Your beneficiaries don’t get the full benefits of life insurance because the payout gets applied to your debt, and if you have no debt, there’s no payout. In other words, your beneficiaries would get zero. Nada. Zilch.

So, let’s go back and look at that $500,000 term life policy example I mentioned earlier and apply it to real life. If you had a standard decreasing term life policy and died in the last month of the term, your family would get zero dollars. But if you had a regular term life policy, they would get $500,000.

Now, here’s the question: If life insurance is about protecting your family’s long-term financial plan, how on earth can you plan for something you don’t know the value of? That’s the problem with decreasing term life policies. You never know how much the policy will be worth when you die, so it provides your family very little financial security.

Remember how I told you the two main life insurance types were term life (which I just explained) and whole life? Well, the second kind lasts . . . (wait for it) your whole life. It’s also sometimes called permanent life. (Isn’t that marketing genius? Sheesh.)

How it works: With whole life insurance, you buy a policy and lock in the premium and benefit amount for your whole life. And each month when you pay your premium to the insurance company, a portion of that premium goes into a cash value account that—you hope—grows during the life of the policy. (That’s probably why policies like this are also called cash value life insurance.) When you die, your beneficiaries get the death benefit.

Think of cash value life insurance as a savings account you’re depositing money into every month. It’s a pool of money you own and can access or borrow against. The longer you have the policy, the more cash value the policy has.

Pros: Whole life covers you for your whole life. The policy stays in effect until you die or stop paying your premium. That may sound good . . . until you read these cons!

Cons: Whole life is a rip-off, simple as that. Life insurance has one job—to pay your beneficiaries if you die. Whole life is expensive because you pay for it for your whole life—but you probably don’t need the policy for your whole life. And because part of your premium is used to grow your cash value, you’re paying more for less insurance. That sucks.

And get this: That extra amount you’re paying into whole life policies also doesn’t gain as much cash value as it would if it were invested in a good mutual fund. Does it make sense to spend more money for less coverage and a bad long-term investment? (That was rhetorical. The only answer is nope.)

One more note: When you die, your beneficiaries receive the death benefit. But what happens to the cash value you built up over all those years? Well, if you didn’t use it while you were alive—it’s gone. That’s right, poof. The insurance company keeps any remaining cash value. Like I said—total rip-off.

So that’s my overview. Now let’s talk through the other equally bad types of whole life insurance.

How it works: Universal life insurance has a death benefit and a cash value that earns interest. It also offers flexible premiums—meaning you could potentially access some of the cash value to cover part or all of your premium payment. Are you following? Because for universal life, there are some major mental gymnastics happening when it comes to purchasing what you actually need.

Pros: Flexible premiums are helpful if money is tight and you need some money to cover an emergency expense.

Cons: Universal life is expensive. Basically, part of the monthly premium of a universal life policy goes toward the death benefit and another part is invested as “savings.” The thought is that the investment will grow with time—and maybe even enough to offset the premiums altogether.

I know these perks (death benefit, cash value and that sweet, sweet interest) sound like an amazing option, but in reality this is a terrible investment strategy. Universal life policies have super high management fees and low returns on the cash value. Stay far away.

Find out more about universal life insurance.

How it works: Variable life gets its name from the way the cash portion of the policy is invested—both your investment choices and their value can vary.

Pros: The death benefit amount is fixed. Plus, you get to pick from a variety of investment options—and as with any investment, you could see some returns for use in retirement. But . . .

Cons: It’s hard to get much ROI when you keep getting hit with fees! And these policies are riddled with fees and expenses, including transaction fees any time you want to do something like, I dunno, transfer or withdraw money from the policy’s cash account. You could also have your policy lapse and see your coverage canceled due to missed payments from that cash account.

So the variables in variable life are the investments and the ROI—but the things that keep going are the endless fees along with that sinking feeling you could become uninsured at any moment. No thanks.

Learn more about variable life insurance.

I know it’s starting to feel like the names of these policies are all running together—and let’s be real, permanent life insurance is 10 variations on a single theme of lame. But stick with me.

How it works: Variable universal life is a mix of a life insurance policy, a savings account, and a mutual fund. Most 3-in-1 products tend to stink (looking at you, Axe 3-in-1 Body Wash Shampoo and Conditioner), and this insurance product is no exception.

Variable universal life insurance also lets you decide how your cash value is invested in a variety of investment options, and you get to pick how risky you are with those investments. That’s the “variable” part. And unlike the regular old variable life, variable universal life has a flexible death benefit amount. It’s a whole lotta moving parts!

Pros: You’re in control of where your money is invested. But remember that insurance is about risk and who assumes the risk. So, you bear the risk of your investments—not the insurance company.

Cons: Variable universal life policies are expensive and have no guarantees when it comes to their cash value. They’re one of the worst life insurance options on the market because of the high management fees. (Are you seeing a fee trend here?) Again, you’d be better off getting a much more affordable term life policy and putting that extra hard-earned money in mutual fund investments.

Please, people: Keep life insurance and investments simple and separate. Mixing them up complicates everything and achieves nothing good. (Have we learned nothing from terrible hybrid products like the ketchup-ranch combo from Heinz known as Kranch Saucy Sauce?)

How it works: As with other permanent policies, indexed universal life (IUL) plans include both a cash value portion and a life insurance portion with a death benefit. The key difference here is that the cash value portion tracks an index fund. (Little backstory: An index fund’s a type of mutual fund designed to mirror the performance of the stock market or a particular area of the stock market.)

Pros: If the stock market does well, the cash value will go up.

Cons: So many cons. The rate of return will always be a little lower than the performance of the index fund because the insurance company will take their hefty share. And what if the market isn’t doing well? The cash value portion of your IUL policy will drop too. Gasp! Shocking, I know. And the unpredictability means sometimes you could pay way more for your premiums, and other times, you could pay less. Avoid this one like one-ply toilet paper and no-show socks that show.

Learn more about indexed universal life.

How it works: If you’re like me, you don’t like the idea of having your life insurance premiums tied to market performance. Well, with a guaranteed universal life policy, at least that risk is gone. (Still sucks though.)

Pros: Your premiums stay the same because the interest rates are set from the start of the policy. As long as you pay your premium, you’ll have coverage for the rest of your life. (Why, though?) Best thing you can say about GULI is it’s the least risky universal life insurance policy—kind of like a shallow money pit.

Cons: Since your premiums don’t adjust based on market performance, the plan barely builds any cash value. That’s because guaranteed universal life insurance isn’t really designed to build cash. It’s too busy trying to keep up with the cost of insurance.

How it works: Joint life insurance, also called first-to-die insurance (how . . . romantic?) is a cash value policy marketed to couples who want to share a policy between them. Think of joint life insurance policies as the joint checking account of the life insurance world. The policy covers two individuals for one fee. These policies pay a death benefit as soon as the first spouse dies. Another related term to watch out for is family life insurance, a kind of coverage that's often packaged with a joint life policy.

Pros: You only pay a single premium.

Cons: If your finances are like most families, one spouse makes more than the other—sometimes a lot more. Remember, the job of life insurance is to replace someone’s income when they die. Joint life insurance super-sucks because it takes a one-size-fits-all approach by paying out the same exact benefit to either spouse. (And as a smaller-framed fella, I know more than most that one size does not, in fact, fit all.)

Think how this kind of policy could screw you over. You could be paying a lot more to insure your spouse’s part-time income from the local fabric store than you would if you were to simply buy two term life policies. A joint life policy doesn’t make a whole lot of sense when you weigh the costs.

And if a couple dies at the same time in some kind of tragic accident? Well, the death benefit goes to their heirs.

How it works: A survivorship life policy, which is also a type of cash value policy, pays absolutely zero benefit to anyone until both spouses die. Then, it pays your kids.

Pros: Survivorship policies are mostly geared toward wealthy people wanting to avoid large estate taxes on what they leave behind. They aren’t intended to support your spouse because by that point, you’ll both be in the great beyond.

Cons: If joint life insurance policies don’t make much sense, then survivorship or second-to-die life insurance policies are a complete waste of your money. I recommend you avoid survivorship life policies completely because your spouse isn’t covered when you die. As with any kind of cash value policy, I’m going to beat the dead horse (hopefully it had life insurance) once again: You and your spouse are way better off getting a term life policy at a much lower cost and then investing in a good mutual fund instead.

How it works: Final expense insurance (or burial insurance) is a type of cash value insurance that covers your funeral expenses when you die.

Pros: It’s relatively inexpensive and saves your loved ones the cost of paying for your funeral.

Cons: Flashy advertisements will make you think you’re sparing your family the burden of paying for your funeral. It’s all about peace of mind knowing your funeral expenses are covered before you die. In fact, it’s often marketed as the best life insurance for seniors.

But burial insurance is a completely emotional purchase that makes absolutely no sense financially. You can easily plan to pay for your funeral by setting aside $50 a month every month starting at age 55.

Let’s say you live to the ripe age of 76 years old (the average lifespan in America).¹ That’s 21 years of socking away $50 a month—more than $12,000—assuming you don’t invest that money. If you invest it with an average return of 11% a year, you’ll have saved almost $50,000. Since the median cost of a funeral is around $7,800, why not just save up the money to pay for your own funeral and tell the insurance company to take a hike?²

Learn more about final expense insurance.

Other Life Insurance Features

I’ve shown you the awesome beauty of term life insurance and the ugly truth about whole life garbage. That covers the basics. But I really love insurance, so why end the party here? I think we’re having a good time. Let’s cover a few more that you might stumble upon out there in this wild world.

How it works: Applying for either a term or whole life policy used to be like trying out for a sports team. (Not that I know from personal experience . . . I was less athlete and more mathlete back in the day.) You had to get a complete medical screening just to get started! But due to recent market changes, no medical exam policies and touchless exams are the new norm. There are two sub-types of life insurance without a medical exam:

These policies don’t require a medical exam, but they do require applicants to answer a health questionnaire. Some examples of questions they might ask are if you smoke, if you or a family member have ever had a chronic condition, etc. (P.S. I shouldn’t have to say this, but never lie on these questionnaires. That’s quite literally insurance fraud and could result in policy cancellation, claim denial, or an inability to get insurance with another company.)

Guaranteed issue has even fewer strings attached than the simplified policy—you don’t even have to answer any questions about your health! Many companies limit this type of coverage to people who are at least 40 years old, and some companies don’t offer it to those over 80. But if you’re in that age range, you’ll probably qualify. One drawback here is if you die within the initial waiting period before benefits kick in, your beneficiaries won’t get the death benefit.

Pros: A no medical exam policy means you won’t have to get a blood draw or have a physical. And guaranteed issue plans allow those with health issues who’ve been declined for other kinds of policies to get enough life insurance to cover funeral expenses.

Cons: A no medical exam policy is usually more expensive than a comparable term life policy with a medical exam. And with guaranteed issue in particular, keep a couple things in mind—you’ll have a waiting period, and the death benefit basically just covers funeral expenses.

Learn more about no medical exam policies.

How it works: An accidental death and dismemberment policy, or AD&D, is a policy that pays out if you die in an accident or lose a limb and can’t work. In the case of dismemberment (ouch!), it pays a portion of the benefit. If you die in an accident, it pays the full death benefit.

Pros: These policies are pretty cheap—usually just a few bucks a paycheck.

Cons: Many AD&D policies won’t pay a death benefit if you die from a medical procedure, a health-related issue or a drug overdose. And as you get older, your chances of dying by accident shrink a lot. That’s why an AD&D policy is no substitute for—wait for it—a term life policy. Plus, regular life insurance policies already include death from accidents anyway.

How it works: Group life insurance is bought by an organization or company—which explains the name group—and then offered as a benefit to its employees.

Pros: The good news is group life is usually free through your employer. It’s also another way to get life insurance without having to take a medical exam.

Cons: Unfortunately, the death benefit from basic group life insurance is nothing big. That’s because these plans typically only cover a few times your salary. Remember, I always recommend getting a life insurance policy that provides a benefit 10 to 12 times your annual income. Here’s another snag with group policies: If you get a new job, you could lose your coverage the day you leave your company. The key takeaway here is to always have a separate term life policy of your own in place, regardless of what your employer offers.

Learn more about group life insurance.

Comparing Different Types of Life Insurance

In case you’re trying to game out the differences between specific policy pairings, I’ll go over a few comparisons here.

Term vs. Whole

Here’s the difference between term life and whole life insurance in a nutshell. Term life has a set premium that remains the same throughout the life of the policy, and it only lasts for a defined number of years. (This is what you should buy for yourself and your spouse.) Whole life premiums can vary (a lot), last your whole life even after you’re past the age when you’d need a death benefit for dependents, and are over-complicated by bad investment options.

Variable vs. Variable Universal

No need to scroll back up if you missed my earlier breakdowns of these two coverage types. I’ll just remind you that both allow you to choose how your cash value is invested. And the main difference between variable and variable universal is that plain-old variable has a fixed death benefit amount, while variable universal has a flexible one.

Indexed Universal vs. Variable Universal

Next, let’s compare indexed universal and variable universal. Once again, we’re talking about two different forms of permanent life insurance—otherwise known as two flavors of something gross (like those Jell-O salads your Aunt Donna brings to Thanksgiving every year).

Unlike indexed universal, a variable universal policy lets you pick from a variety of investment options to put your cash value into. Big whoop. It still messes with your life insurance, and it doesn’t compare as an investment to good old mutual funds. Hard pass.

Life Insurance Basics

Still reading? Bless you and your love for learning about insurance. Now that we’ve gone into such a deep dive on it, it’s time to pull back and answer a few of the very basic questions.

What Is Life Insurance?

Life insurance is just an agreement between you and an insurance company. You pay them a monthly premium, and if you die, the insurance company pays a specific amount of money—a life insurance payout—to whoever you choose. Everyone with loved ones who depend on them financially should have life insurance.

Why Do I Need Life Insurance?

No one wants to talk about it, but we have to. You need life insurance if anyone in your life relies on you or your income. When you’re gone, your loved ones will grieve. This is unavoidable. But leaving them penniless while grieving is avoidable. Make sure they’ll be financially secure no matter what.

How Much Life Insurance Do I Need?

For example, if you make $40,000, I want you to carry at least $400,000 in coverage. Want me to show you the math? 

If your surviving spouse invests that $400,000, in good mutual funds within a non-retirement account, with an average 10–12% return, they could potentially peel off $40,000 a year from that investment to replace your income without cutting too much into the original $400,000 investment. (Shout-out to compound growth!) Even if drawing it down at that rate depleted the payout eventually, it would still last them a long time. It’ll all depend on how much they take out and the actual yearly returns.

I recommend carrying a term life insurance policy that covers 10 to 12 times your annual, pretax income. (To get an idea of what that number looks like for you, check out our term life calculator.) 

The Best Type of Life Insurance

Life insurance should be simple. That’s why I recommend only purchasing a term life insurance policy. It’s straightforward, affordable and designed to do one thing over the long term: support your loved ones if you die. And as an added bonus, the death benefits of a term life insurance policy are almost always tax-free.

Term life is the only way to go if you want to be smart, save money, and truly provide yourself and those you love with long-term peace of mind.

Here’s why I love term life insurance. Like I’ve been saying:

• It’s usually the lowest-cost type of life insurance you can buy.
• It does the one thing life insurance is supposed to do: replace your income when you’re gone.
• It’s a proactive way to take care of those you love today so they don’t have a financial burden after you pass.

How Much Does Life Insurance Cost?

Your age is the main factor in figuring out your cost for term life insurance. If you’re wondering why, it’s simply because your probability of dying goes up as you age. I don’t make the rules. That’s life.

Of course, there are other factors as well. A few more things insurance companies look at to calculate a term life rate include:

• Whether you use tobacco: Rates are higher—sometimes double—for smokers.
• Your health: Eat those peas and get your powerwalk on!
• Your gender: Men have shorter life expectancy because they tend to take risks and take on more dangerous jobs, so their rates are higher in general, regardless of age.

You can use our Term Life Estimator to find the average rates for term life policies based on age.

Get Term Life Insurance in Place Today

When it comes to choosing the right life insurance to fit your family's needs, you've got options. A lot of options. But don't let that stop you from getting the right policy in place. Nothing beats the peace of mind that comes from knowing your family will be covered in case the worst happens. 

Whether you’re in the market for a new life insurance policy or just wondering if you’re carrying the right kind of life insurance, I recommend RamseyTrusted partner Zander Insurance. Their insurance professionals will walk you through the process of securing a term life policy that fits your family’s needs. 

Start here to get your term life insurance quotes.

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