There are two main types of life insurance policies to choose from: permanent life and term life.
The difference between term life insurance and permanent life insurance is similar to the difference between renting an apartment (term life) and owning a home (permanent life).
When you rent, you have a lease for a certain term. When that lease is over, you can renew — but most likely with a rent increase. Likewise, term insurance lasts for a specified period, and when it’s up you can reapply for coverage, but the premiums most likely will go up as you age and your health deteriorates.
Permanent life insurance has a death benefit for your beneficiaries and a cash value that you can use during your lifetime. It’s like owning a home, where you gain equity that can be used as collateral — and your home can be left to your heirs leaving a legacy.
| Term life insurance | Permanent life insurance |
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Whether you choose permanent or term life insurance, you will need to go through the underwriting process. The underwriting process is how the insurance company determines your insurability — determining how much of a risk you are and how much to lend you.
It collects information about your health (medical history), job, income, finances, and other personal information to determine how much they will insure you and what your premium will be. It may require a medical exam, which includes the collection of a blood and urine sample.
Types of permanent life insurance policies
There are different types of permanent life insurance. They all have death benefits and a cash value that grows with tax deferred.
The biggest difference between the types of permanent life insurance policies is how the cash value component of the plan is invested.
| Types of permanent life insurance | Best for | Where is the cash value invested |
| Whole Life | Guaranteeing exact same premium for the life of the policy | In your insurance company’s portfolio |
| Universal Life | The flexibility to change your premium, death benefit, and cash value over time | In your insurance company’s portfolio |
| Guaranteed Universal Life | Flexibility of a universal life policy with guaranteed rates of whole life | In your insurance company’s portfolio |
| Indexed Universal Life | Like universal life instead of interest rates in fixed indexed market | Fixed index stocks and options |
| Variable Life | Investing your cash value in the stock market rather than your insurance company | Stock market |
| Variable Universal Life | The flexibility to change your death benefit, investing in the stock market rather than your insurance company | Stock market |
Whole life: Guarantees the exact same payment for the life of the policy. The insurance company invests your premium with its own portfolio. The attraction is that your payment stays the same for the life of the policy. Many whole life insurance companies also offer to increase the death benefit over time.
Universal life: Created in the 1980s when interest rates were high, universal life insurance policies allow you flexibility. You can raise or lower your death benefit, and you can change your premium payments if your circumstances change.
Variable life: This type of permanent life insurance policy was created years after universal life for people who didn’t like how whole and universal life commingled their investments with the insurance company.
Variable life is for those who want control over the way their cash value earns interest. You money is invested in the stock market, rather than with the insurance company. If the market does well, so do you, but if the market falls, so does your cash value, making it riskier than whole and universal life.
Variable universal life: Variable universal life is a combination of universal and variable life insurance. You can raise or lower your death benefit and have your cash value invested in the stock market. Again, this is risky, but if the market goes up, so does your cash value.
Ronda is an attorney, writer, and entrepreneur. She is a contributing writer for the Huffington Post. Originally from Chicago, she has lived in Los Angeles and New York. She loves to travel and is passionate about education equity, especially for first generation college students.