Life Insurance

The Most Widely Known Type of Life Insurance

Term life insurance is the most widely known type and provides a death benefit for a fixed number of years – typically a 5, 10, 15, 20, 25 or 30 period– which you decide when you choose when you buy the policy. Premiums are paid for each year of the term. If you purchase level-premium insurance, which is common, you’ll pay the same rate each year. When the term is up, you stop paying premiums and you no longer have coverage. If you die at any point during the term, your beneficiaries receive a death benefit. If you die after the terms ends, your beneficiaries get nothing.

Term life insurance is generally the least expensive type of life insurance for the amount of coverage you get and it is the easiest type of life insurance to understand. For these reasons, it is also the best type of life insurance for most people. 

A variation on basic term life insurance called convertible term insurance can be turned into a permanent whole or universal life insurance policy at any point during your policy term without having to requalify medically. Your policy might specify that you can only convert the policy up to a certain age, such as age 70. 

 Term life insurance is generally the least expensive type of life insurance for the amount of coverage you get and it is the easiest type of life insurance to understand. For these reasons, it is also the best type of life insurance for most people. 

 Whole life insurance provides a death benefit no matter how old you are, as long as you continue to pay the policy’s premiums. For this reason, it’s considered a type of permanent life insurance.  

 In addition to providing a death benefit, a whole life insurance policy also accumulates cash value that is guaranteed to grow by a certain amount each year. As a result, whole life premiums are significantly higher than term life premiums for the same death benefit.  Part of your premiums for the first few years of the policy will go toward administrative fees and the agent’s commission. The premiums are the same each year, and you can choose to pay premiums every year for as long as the policy is in effect or for a set number of years. Spreading your total premiums out over just 10, 15 or 20 years instead of over a lifetime will result in a higher annual premium during those years, but may be an appealing feature for someone who wants to eliminate the ongoing expense of life insurance premiums before retirement. A variation called single-premium whole life insurance lets you pay the entire premium up front in a lump sum. 

You can borrow against the policy’s cash value for any reason, such as paying for your children’s college tuition or covering an emergency expense. Whatever part of the loan you haven’t repaid at your death gets subtracted from the policy’s death benefit. But any accumulated cash value that exists at your death does not get added to the policy’s death benefit; it goes back to the insurance company. 

The other reason whole life insurance costs more than term life insurance is that whole life insurance policies often pay annual dividends. These dividends can be used to help pay premiums or to purchase more insurance, or the insurance company can simply send you a check for the dividend amount.

Because whole life is difficult to understand and expensive for the amount of coverage it provides, it is not the best option for most people. That’s why you’ll often hear the phrase, “Buy term and invest the difference.” Investing the money you save by purchasing term instead of whole life insurance rather than putting it into a cash value and paying an agent’s commissions will be a better use of that money for most people. That being said, whole life is simpler than universal or variable life insurance. ​ 

 Universal life insurance is another type of permanent life insurance. It is similar to whole life in many ways, but offers greater flexibility.  You can increase or decrease the death benefit and the cash value after you take the policy out if your needs change. The premiums will go up or down accordingly. Increasing the death benefit requires you to pass medical underwriting; decreasing the death benefit may result in surrender charges. The cash value earns interest based on the performance of investments chosen by the insurance company. This type of insurance also offers flexibility in the timing of premium payments. 

Universal life is even more complicated than whole life and can also be more expensive. Also, these policies can become underfunded over time because the interest the cash value earns isn’t always enough to cover its sometimes rapidly increasing premiums. If a policy becomes underfunded, you have to pay extra to keep it in force. Otherwise, the policy will lapse. Universal life insurance also has expensive administrative and management fees that come out of your premiums. Because of its complexity and cost, universal life is not recommended for most consumers. However, as with other types of permanent life insurance, the ability to borrow against the policy’s cash value at low interest rates and without a credit check is an attractive feature for some consumers. 

Guaranteed Universal Life 
Guaranteed universal life insurance offers coverage until age 90, 95 or even until your death but is less expensive than whole life insurance or universal life insurance. It doesn’t have a cash value or investment component, or the accompanying management fees, and the premiums can be paid as level premiums for a lifetime or for a shorter term, similar to whole life insurance. Unlike regular universal life insurance, the policy is not at risk of becoming underfunded and requiring additional premiums to remain in force. This type of policy can be appealing to seniors who still need coverage; it can be cheaper and provide better protection than term life insurance in that situation. The policy has a guaranteed death benefit in amount you select when you take out the policy. Some guaranteed universal life policies are at risk of lapsing if the policyholder misses a premium payment; other policies are no-lapse policies and do not carry this risk. It is a relatively simple product and can be a good alternative to term life insurance for individuals that want permanent coverage.