What Is the Difference Between Term, Whole Life, and Universal Life Insurance?
Life insurance provides you with peace of mind and your loved ones with financial stability in the event of your death. Life insurance is essential for retirement planning and those with growing families, but the multiple types of life insurance can make finding a policy confusing.
The three types of life insurance are term, whole life, and universal; each brings differing coverage and costs. The type of insurance any one-person needs will depend on his or her exact situation.
Term Life Insurance
Insurers also refer to term life insurance as temporary life insurance due to the structure of these policies. With term life insurance, your coverage is in effect for a set number of years, with common numbers falling at ten, twenty, and thirty years. These policies guarantee coverage for the contracted time without needing to requalify year after year. Once the policy expires, the policyholder will need to apply for a new term.
Term policies are generally much cheaper than the other types due to the shorter period of coverage, which makes them appealing for many. The disadvantage comes in that policyholders must reapply once the term is up, which involves higher premium costs as older age increases the chance of death. There is also no savings feature as with other types of life insurance.
Whole Life Insurance
As the name suggests, whole life insurance lasts for the policyholder’s whole life. As a trade-off, the price of whole life policies tends to be higher than term insurance. These fixed premiums mean policyholders can lock in a lower rate if they apply for whole life insurance when they are younger and healthy.
Whole life insurance policies also work on tax-deferred cash accumulation, allowing your premium costs to build value over time. If policyholders leave their premium’s value untouched, that amount becomes part of the benefits distributed to the holder’s beneficiaries upon death. However, whole life insurance returns tend to hold lower overall value than those that come from other investments.
Universal Life Insurance
Much like whole life insurance, universal life insurance is a permeant policy that allows for policyholders to build up cash value over time. Universal policies start to diverge from whole life when it comes to payments – universal coverage allows for premium payments at any time in any amount, allowing for great flexibility. Holding off on payments does affect the overall value of the policy, and insufficient payments can lead to inadequate coverage.
Where whole life policies build cash through tax-deferral, universal policies gain value through investments such as stocks, bonds, and annuities. The exact investment path depends on the company’s policies. Because of this cash building strategy, there is the potential for much greater gains than in a whole life policy, but there is also much greater risk and the potential for investment values to affect both death benefits and premiums.
Term life insurance is the least expensive, but it also does not last for the policyholder’s whole life. Universal policies come with a bigger chance to increase cash value, but they also come with greater risks. Those who are selecting a policy at an older age may only need temporary coverage of term insurance, while those who are younger can secure a lifelong policy at a much lower cost.
While permeant policies can work as an investment, it is best not to think of them that way. While companies may advertise otherwise, the purpose of life insurance is to secure the well-being of loved ones and dependents in the event of death. Everyone should consider their situation and financial needs carefully before selecting a life insurance policy.