Updated
Fact Checked
Eric McWhinnie
Comparing health insurance to life insurance is a lot like comparing socks to shoes. They're two different things that work well together when paired. Health insurance protects our health, which is vital. But life insurance protects the finances and well-being of our loved ones when we die. Here, we'll explain what health and life insurance have in common, how they're different, and how they can work together to protect your money.
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What is life insurance?
Life insurance protects your loved ones in the event you unexpectedly pass away. When you purchase life insurance, you promise to pay the insurer monthly premiums. In return, the insurer promises to send payouts to your loved ones after you die -- assuming you're still insured.
You, the policy owner, decide which type of life insurance you want, how long you want it to last (the "term"), and how much you want life insurance coverage to pay your heirs (the "death benefit").
Benefits of life insurance plans
Sure, life insurance only pays your heirs after you pass away. But policies also offer benefits to the policyholder while they're still alive. These benefits include the following:
- Peace of mind. Loved ones will be paid after the policyholder dies. They'll be okay.
- Cash value. Some policies build a cash stash policyholders can borrow from.
- Lifetime value. Some policies can be extended throughout a person's lifetime.
All life insurance plans offer peace of mind, but only some plans offer cash and lifetime value. Below, we'll cover the five types of life insurance plans. (Of these, most policyholders will opt for term life insurance, the most affordable plan.)
Types of life insurance plans
You're scrolling through policies, but there's just too many options. Which type of life insurance is best? Which do people normally get? You have choices. Start with the most common types of life insurance.
Term life
AA term life policy lasts for an agreed-upon term, anywhere from one to 40 years. It works like a subscription: As long as you pay monthly/yearly premiums, you're covered. Once the term expires, your coverage ends. Most term policies don't refund premiums. The few that do are typically much pricier than usual.
Whole life
A whole life policy lasts a lifetime, assuming premiums are paid. Whole life guarantees premiums will remain flat, the death benefits will remain consistent, and the policy will build cash value. In theory, it's permanent.
Variable life
Another type of permanent life insurance is variable life. Policyholders can invest their cash value however they'd like. This is a double-edged sword. One one hand, well-performing investments may earn the policyholder extra cash. On the other hand, poor-performing investments could eat into the policyholder's cash and their heirs' death benefit. Compared to whole life, variable life is higher-risk, higher-reward.
Universal life
Another alternative to whole life insurance is universal life insurance. Like whole life, universal life policies are permanent, but universal life policies are typically cheaper and more flexible. However, it can get complicated. For example, with one, the premiums might change, while another may or may not build cash value.
Survivorship life
A survivorship life insurance policy insures two people -- typically spouses -- under a single policy. A payout is only made to heirs after both policyholders have died. It may be less expensive than buying two separate policies. This policy type is permanent (i.e. lasts a lifetime).
Term life is popular because it's affordable, but wealthier folks may prefer to pay up for whole life insurance, which offers complete coverage and other perks. If you're on the fence, check out which better meets your needs: term vs. whole life insurance.
What is health insurance?
Health insurance pays for the policyholder's medical expenses. You, the policyholder, pledge to make regular monthly/yearly payments. In exchange, the insurer promises to pay part of your medical fees -- most of them, anyway. Typically, there are health-related expenses health insurance companies won't pay. They include procedures like cosmetic surgery and some experimental treatments.
Benefits of health insurance plans
The benefits of health insurance are straightforward. Having a health insurance policy benefits the policyholder in the following ways:
- Safety net: The policyholder may pay fewer and cheaper medical fees.
- Predictability: The policyholder can plan around the maximum they'll pay yearly.
- Better health: Health insurance typically covers regular checkups. The more checkups you have, the more likely your doctor will diagnose a disease before it becomes serious.
- Peace of mind: Your policy may cover loved ones, too. They reap the same benefits as you: a safety net, predictability, and better health (thanks to cheap, regular checkups).
A health insurance plan may be covered by an employer, or you may pay for it out of pocket. From there, you can select between one of four types of plans. More on those below.
Types of health insurance plans
As with life insurance, there are different types of health insurance plans from which to choose.
Employer sponsored
The employer covers part of the monthly/yearly premium, and the employee covers the rest.. The employee may or may not get to choose their sponsored plan.
Private
The policyholder purchases a plan directly from a health insurance marketplace.l Often, they begin by visiting the federal Health Insurance Marketplace online. There, they can browse plans available through the Affordable Care Act (or "Obamacare"). Some states, like California, offer other marketplaces from which to shop.
Once a person visits the marketplace, they'll need to choose between plans like these:
- Exclusive Provider Organization (EPO): Care is covered only if the patient uses the doctors and hospitals in the plan's network, unless it's an emergency.
- Health Maintenance Organization (HMO): Care is covered only at doctors and hospitals that either work for or contract with the HMO provider. HMO plans tend to cover preventive care.
- Point of Service (POS): Care is cheaper, but policyholders have limited choices. A POS policy offers elements of both HMO and PPO policies.
- Preferred Provider Organization (PPO): Care is covered at many providers, but premiums are more expensive.
EPOs are some of the most affordable policies, and PPOs are the most flexible. Keep in mind, no health insurance policy offers death benefits. That's the domain of life insurance policies.
What is the difference between life insurance and health insurance?
Both health insurance and life insurance may be purchased through an insurance agent and require monthly/yearly premiums, but there are several differences:
| Features | Life insurance | Health insurance |
|---|---|---|
| Health benefits | No | Yes |
| Death benefits | Yes | No |
| Cash value | Sometimes | No |
| Lifetime value | Sometimes | Sometimes |
Which is more important -- life insurance or health insurance?
Health insurance is typically more important. It keeps one healthy in body and finances, and this benefits both the policyholder and their heirs. Life insurance mostly benefits beneficiaries. Independently wealthy people may have no need for life insurance.
These policies are financial safety nets. Consider whether the finances of you and your heirs are strong enough to survive big medical bills and the financial impact of your death. If not, you may want to invest in a stronger net. For comprehensive coverage, purchase both.
Why do you need both health and life insurance?
There are times in your life when both health and life insurance prove useful.
College
Preventive care keeps college students healthy. Health insurance covers many preventive procedures.
Is your kid on the hook for student debt? A life insurance policy could help them pay for it in the event you pass away and are unable to contribute.
Young adulthood
One step forward, two steps back. Young adulthood is hard financially -- you must take control of (and responsibility for) your finances. A solid health insurance plan prevents unforeseen medical costs from sabotaging finances.
A young adult might take on new debt to finance a mortgage with a partner. They might wish to take out life insurance and designate their partner as a beneficiary. That way, should the policyholder perish, their partner could afford to continue to make mortgage payments.
Middle age
By middle age, a person may be dealing with health conditions like painful joints or diabetes. Health insurance can protect them from loss should a serious health issue arise. By this time in life, many people have a life partner and children. If they die, life insurance can protect the people they love from financial hardship.
Retirement
By the time a person retires, they typically have government-sponsored health insurance. Even if they've built up a nest egg large enough to provide for their loved ones, they can have their life insurance policy donate extra funds to charities and causes they care about most.
How to buy life and health insurance policies
How a person goes about purchasing life insurance depends on whether they're getting it through their employer or purchasing a policy independently.
Normally, an employer explains the policies offered, making the process fairly straightforward. Independent buyers must purchase from marketplaces, which typically offer many more plans. A good place to start is the Health Insurance Marketplace. If the buyer can't find a policy they're comfortable with, they can request quotes from major insurance companies. Many will provide these at no cost.
Shop around for best results. Read in-depth reviews about different policy types, and speak with a reputable insurance agent. Determine your primary goals in advance, and purchase the policy that best matches those goals.
FAQs
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No, health and life insurance are two different things. Health insurance protects your health and finances while you're alive. Life insurance pays your heirs following your death.
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Absolutely. There is no way to know what's around the corner. You could become ill or get into a serious accident, or simply need a series of expensive tests covered. There's never a "good time" to be without health insurance. If you can afford it, it's worth paying for.
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Life insurance and health insurance satisfy different needs. Health insurance keeps your finances healthy. The No. 1 cause of bankruptcy in the U.S. is unpaid medical bills. Avoid that. Life insurance keeps your loved ones safe. Life insurance provides them with the funds they need to get by after you pass away and are unable to support them financially.
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It depends on their age and pre-existing health conditions. The average non-smoking 30-year-old man who takes out a $500,000 term life policy today will pay around $25 per month. If the same man waits until he's 50 to buy the policy, he'll pay around $84 per month. The older you are, the more expensive life and health insurance become.
Our Insurance Experts
Dana George has a BA in Management and Organization Development from Spring Arbor University. For more than 25 years, she has written and reported on business and finance, and she's still passionate about her work. Dana and her husband recently moved to Champaign, Illinois, home of the Fighting Illini. And though she finds the color orange unflattering on most people, she thinks they'll enjoy Champaign tremendously.
Cole Tretheway is a full-time personal finance writer whose articles have been featured on The Ascent and The Motley Fool. He has a degree in English with a Certificate in Professional and Technical Communication from California Polytechnic University, SLO.
Fact Checked
Eric McWhinnie
Eric McWhinnie has been writing and editing digital content since 2010. He specializes in personal finance and investing. He also holds a bachelor’s degree in Finance.
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