The insurance industry in general is full of jargon, and life insurance is no exception. Knowing your options is the first and most important step to picking the right type of life insurance for you. Here’s an overview of term, whole, and universal life insurance and the differences between them.
Term Life Insurance is life insurance policy with a specified duration of coverage. Term life insurance premiums are typically lower than other types of life insurance. However, term life policies do not accumulate cash value like permanent life insurance.
Whole Life Insurance is a type of permanent life insurance policy designed to provide coverage for the lifetime of the insured. In addition to the death benefit, whole life insurance policies accrue a guaranteed cash value that can be used to pay your policy premiums when you are unable or as a source of emergency funds.
Universal Life Insurance is another type of permanent life insurance policy. Much like whole life, universal life insurance accounts carry a cash value, although the amount is variable rather than guaranteed. Universal life insurance, however, is generally more flexible than whole life insurance, allowing the policy holder some leeway to vary the premium and death benefit.
Which kind of life insurance is best? According to the experts, each is useful for different purposes. In fact, a sound financial plan may involve more than one at the same time.
Term life is best used to cover costs that are expected to be temporary. Mortgage protection insurance, for example, is a type of term life insurance with a coverage period set to the term of your mortgage. Term life insurance is also helpful as a way of providing for children, who can often be expected to be self-sufficient after 20 years or so.
Whole and universal life insurance, on the other hand, are best used to cover expenses that occur independently of the time of death, such as funeral expenses. They are also an excellent way of saving money for later in life, because their cash values are not subject to income tax in most cases.
The choice between whole life insurance and universal life insurance largely depends upon your financial situation and saving preferences. Whole life provides a guaranteed cash value with a fixed premium, whereas universal life provides a flexible premium but a variable cash value. Deciding which is best for you will require that you carefully weigh your long-term capability to pay the premium as well as the risk you’re willing to accept for a higher return on your investment.
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