There are three main types of life insurance: whole life, universal life, and term life insurance. In each of the three broad types, there are many variations of each but we will take a look at the broad categories while pointing out a few of the finer points of each type.
And just to be clear, this website will not ever tell you that one type of life insurance is better than any other. Each category serves its own unique purpose for unique circumstances.
Remember, first and foremost that life insurance exists to pay a death benefit to your chosen beneficiary(s) when you die. Nearly all types of life insurance also offer some sort of living benefit nowadays as well.
Okay, let’s take a look at the three main types of life insurance now.
Whole Life Insurance
Within the realm of whole life insurance, you may stumble upon it being referred to under different names. The two most common other than calling it whole life are “straight life” or “permanent life”. We will spare you the history lesson and only add that whole life insurance is the original type of life insurance. It has been offered in its most modern form since the nineteenth century.
If you are looking for absolute guarantees, there is no product that compares to whole life. In addition to its promise to pay a death benefit if the premium has been paid, it also offers a very stable and safe savings plan. There are all sorts of opinions on the internet about whether whole life is any good, whether it is worth it, and/or is it just a total ripoff.
From personal experience, we can say definitively that it’s not a ripoff. That being said, it should be used appropriately for the right people. Policy design, setup, and service are extremely important for the policy owner to have a satisfactory outcome, particularly when looking at the savings component which is formally called the cash value.
Back to the guarantees for a moment as that is the crucial component for whole life. There are three basic ones:
- A guaranteed rate of return on cash
- A guaranteed cost that will not change and is locked in when you purchase
- A death benefit that is guaranteed to last for your “whole life”
There is a lot more detail to discuss but can read more about all the more detailed aspects of whole life by clicking right here.
Universal Life Insurance
One of the earliest descriptions that I ever heard regarding universal life insurance was that it was “built on a term insurance chassis”. Well, that sounds good but to most normal people (I was normal back then) that does not do quite enough to accurately define it, so let’s try to do better.
Universal life insurance is really a term insurance policy with a savings component attached to it. Just like all other types of life insurance, there is a raw cost to insure your life. In a universal life policy, this is known as the cost of insurance and it is clearly disclosed for you. At its core, you must pay enough premium to cover the cost of insurance to keep the death benefit that you purchased in force.
But you also have other options to cover the costs. If the savings component has cash value (there’s that phrase again) the policy expenses or costs can be covered in whole or in part by the cash value. Universal life insurance is very flexible in that there really is no set premium. You only have to cover the cost of insurance and perhaps a few other expenses to keep the death benefit in force.
Your cash value will have interest credited to it at least annually in most cases. How much and what the interest is based upon is an entirely different discussion and something we have other content that explains more in-depth, you can check that out by going here.
Back the basics of universal life: the term portion of the policy works very much like yearly renewable term insurance as the cost increases a bit each year. It starts out very inexpensive and moves up as you age. This could become a problem and has for some people.
However, as you will read from us or hear from us repeatedly, this only becomes an issue when the policy is incorrectly designed, implemented, and managed. Do not let this deter you from exploring universal life. There is a great deal of misinformation out there that intimidates people into ignoring it as an option.
Term Life Insurance
It will not take quite as much space to accurately explain term life insurance to you. That is because term insurance is very simple.
Remember when you were in school and your teacher told you that you couldn’t use the word itself to define the word on your vocabulary tests? Yeah well, I’m gonna break that rule because I’m not sure how else to do it in this case and this is our site so we can do what we want to.
Term life insurance actually gets the name from the fact that it is life insurance purchased to cover you for a specified period or term. At the end of the term, your level, fixed, and the affordable premium is over and so is your coverage.
Well, that really describes level term life insurance which is offered most commonly in 10, 15, 20, and 30-year terms. There are other types of term insurance but they are largely fading into the past and not entirely relevant anymore. Those other types are decreasing term and yearly (or annually) renewable term insurance.
The vast majority of term life insurance sold today is level term insurance (10, 15, 20, or 30 year level periods).
In most cases at the end of the term, the life insurance company will allow you to continue the same coverage but at a greatly increased cost. Here’s an example:
This is a 20-year term policy for a healthy 43-year-old with a $1,000,000 death benefit. You can see the annual cost is guaranteed level at $854 for 20 years. But when the insured turns 64, if he would like to keep the coverage in force, the premium jumps to $29,050 per year. That is a very substantial jump.
To add one more important detail that is not mentioned above with term insurance…the cash value. That’s because unlike whole life and universal life, term insurance has no cash value or savings component. It is pure insurance offered for a period at an affordable price which makes it a very popular option for those who need a particular amount of coverage to replace their income if they die.
Let’s Put a Bow On It
Each of the three main types of life insurance serves a unique purpose. Do not be enticed by detractors to feel that one is better or worse than another.
Whole life insurance is great for those with a greater amount of discretionary income, a long time horizon, and the desire for safety with strong guarantees.
Universal life is infinitely flexible and can offer better returns on cash value over time if designed, executed, and managed properly.
Term insurance is the utility player of the bunch. It offers inexpensive death benefit protection for those who have a finite need. It works particularly well for a primary breadwinner that needs to make sure their income is replaced for their family when they die.
All types work well and should be considered when you are looking to purchase a new life insurance policy. Choose the right one for your specific need or want. And if you would like to discuss purchasing a policy, please contact us, we're happy to discuss it with you and to help you get the policy you need. In addition to being a resource for life insurance information, we are also agents and work with clients all over the country.