Looking for Life Insurance? Here’s What to Expect From a Term, Whole, or Universal Policy

Most people will have to consider life insurance at some point in their lives, especially if they have family members who rely on them. From term to whole to universal policies, there are seemingly endless options from which to choose. But which one is right for you? The answer will depend on your specific needs and situation. While all three types of life insurance have their advantages, understanding the differences is critical to making the best decision for you and your family.

Let’s take a closer look at the most common types of life insurance to help you decide.

Term Life Insurance

Term life insurance is typically less expensive than other types of insurance. It provides coverage for a specified period of time, usually 10, 20, or 30 years. If you die during that time, your beneficiaries will receive a death benefit; if you don’t die during the term, the policy expires and your family gets nothing.

Because term life insurance is one of the least expensive and simplest types available, it’s an excellent choice for those who only want coverage for a specified period of time, like until your kids reach a certain age or your mortgage is paid off.

Benefits of Term Insurance

Here are a few advantages of term life insurance:

1. It’s affordable: Term life insurance is very affordable, especially when compared to whole life insurance, making it an excellent option for families or individuals on a budget. What’s more, the premium is usually guaranteed to stay the same for the length of the term.
2. It’s flexible: Term life insurance policies can be customized to meet your needs. You can choose the length of the term and the amount of coverage and even add riders to your policy to further customize it.
3. It’s simple: Term life insurance is a very straightforward coverage—with no complicated investment components or cash value accounts to worry about.
4. It’s convertible: If you no longer need term life insurance, most policies can be converted to whole life insurance or another type of permanent life insurance. This gives you the flexibility to change your coverage as your needs change.
5. It’s tax-free: Death benefits from term life insurance are typically tax-free. This means your beneficiaries will receive the full amount of the death benefit without having to pay any taxes on it.

Drawbacks of Term Insurance

It’s important to keep in mind that sometimes the cheapest solution is not always the best solution. Here are some disadvantages to a term policy:

1. Use it or lose it: The use-it-or-lose-it nature of a term policy is a big drawback. No one can predict their death, and with a term insurance policy there’s a strong chance you won’t pass within the specified time frame. In this case, you lose the death benefit and all the premiums you’ve paid over the years. How much could that money be worth if it was invested in the market or in an insurance policy with a cash value?
2. Premium increases: Though the premiums are usually guaranteed during the first term, they can increase exponentially when it comes time to renew. This is especially true if you are past the age of 60 or have experienced any changes in health that may make evidence of insurability a requirement.
3. Financial ratings: Because term policies can last up to 30 years, it is crucial that you thoroughly vet the companies you insure with. This includes researching the financial ratings and overall health of the company. This concern applies to all types of insurance, the cheapest carrier may not be the best carrier.

Permanent Life Insurance

Permanent life insurance is more expensive than term life insurance because it covers you for your entire life. As long as you pay the premiums, your beneficiaries will receive a death benefit when you die. 

Permanent life insurance also has an investment component known as cash value. This cash value grows over time and can be used to help pay premiums or it can be borrowed against in case of an emergency. There are two main types of permanent life insurance: whole and universal.

Whole Life Insurance

Whole life insurance has a guaranteed death benefit and coverage that applies as long as your premiums are paid. Coverage will not decrease or be revoked, and premiums will not increase or decrease over the life of the policy.

Coverage can increase based on increases in cash value or reinvestment of dividends, but it will never decrease below the guaranteed value. The growth of the cash value can be based on a fixed rate of interest or it can be variable. Inside the policy, the cash value will grow on a tax-deferred basis, but once money is withdrawn from the policy, any earnings will be taxable as ordinary income.

Universal Life Insurance

Universal life insurance is another type of permanent insurance, but it has a flexible premium and death benefit. The premium is usually lower than whole life, but the policy usually comes with fewer guarantees.

With this type of insurance, policyholders can choose how their premium payments are invested, which can provide significant growth potential for the cash value of the policy. It is also riskier than whole life because lower interest rates or investment declines could cause your premium payment to go up in order to keep the policy in force.

Generally, universal life policies are recommended for those who have a higher risk tolerance and want a greater degree of control over their insurance investments.

Benefits of Permanent Life Insurance

Permanent life insurance, whether whole or universal, is an excellent alternative for those seeking long-term financial stability. Here are a few of its benefits:

1. Death benefit protection: One of the primary reasons why people purchase life insurance is to provide financial protection for their loved ones in the event of their death. Permanent life insurance policies offer this same death benefit protection but on a much longer-term basis than traditional term life insurance policies.
2. Flexible premium payments (universal only): Another key advantage of permanent life insurance is that it offers policyholders the flexibility to make premium payments that fit their budget and needs. This can be especially beneficial for those who have unexpected changes in their income or cash flow.
3. Tax-deferred growth: Another significant benefit of permanent life insurance is that the policy’s cash value grows on a tax-deferred basis. This means you will not have to pay taxes on any of the growth in your policy’s cash value until you withdraw the money.
4. Access to cash value: One of the best features of permanent life insurance is that it allows policyholders to access their policy’s cash value for various purposes. Some people use this money to help cover unexpected expenses, while others use it to supplement their retirement income.
5. Greater investment control: Both whole and universal policies offer a greater degree of investment control since policyholders on variable policies are allowed to choose how their premium payments are invested.

Drawbacks of Permanent Life Insurance

Some of the downsides of permanent life insurance include:

1. It’s expensive: Permanent life insurance policies are much more expensive than term policies. Not only are you paying for the life insurance coverage, but a portion of your premium is also being invested as part of the cash value. It is essentially “forced savings.” If you do not need additional savings, or simply can’t afford it, permanent life insurance may not be the right choice for you.
2. It’s complicated: There’s a lot that goes into a permanent policy, especially when it comes to the investment component. Policyholders will need to choose their investments and pay close attention to the policy’s terms and conditions about interest rate. If you have a variable policy, your interest rate will often be capped at a certain level, which can make it less desirable than just investing in the open market.
3. Greater risk exposure (universal): Universal policies, especially the variable policies, can expose your cash value to a greater degree of risk than other permanent (whole)  life insurance policies. This is because the cash value earnings are not guaranteed, meaning negative market returns could cause your cash value to decline. 

Need Help Selecting the Right Insurance?

You’ve heard the saying “It’s better to be safe than sorry.” This is especially true when it comes to safeguarding yourself and your loved ones with insurance. Whether you’re looking for term or permanent insurance, it’s always better to know what you’re getting into and have reliable coverage that will help in the event of an unexpected life change. 

Protecting yourself with the right kind of insurance is one of the smartest things you can do, so don’t wait any longer. Reach out to us at Contact@Wadvocate.com or 440-505-5578 to schedule an introductory consultation.

About Jason

Jason Cohen is Chief Operating Officer and wealth advisor at Wealth Advocate Group, LLC, an independent, fee-based wealth management company. Jason has 15 years of experience and spends his days managing firm operations, including portfolio trading and analysis, training of new advisors, financial plan production, and client relationship management. Jason specializes in serving real estate professionals and other independent contractor business owners, helping them navigate their unique financial challenges, such as unpredictable cash flow and tax issues, so they can pursue financial independence and freedom from worry. Jason has a bachelor’s degree in public management from Indiana University and is a CERTIFIED FINANCIAL PLANNER® professional and believes that everyone should have access to comprehensive financial planning. He is passionate about doing his best for his clients and setting others up for success. Outside of the office, you can find Jason staying active in a variety of sports and spending time with friends and family. Learn more about Jason by connecting with him on LinkedIn.

This article is intended to assist in educating you about insurance generally and not to provide personal service. They may not take into account your personal characteristics such as budget, assets, risk tolerance, family situation or activities which may affect the type of insurance that would be right for you. In addition, state insurance laws and insurance underwriting rules may affect available coverage and its costs. Guarantees are based on the claims paying ability of the issuing company. 

Variable Universal Life Insurance/Variable Life Insurance policies are subject to substantial fees and charges.  Policy values will fluctuate and are subject to market risk and to possible loss of principal.