Comparing Various Types of Life Insurance to Find a Policy Which Fits Your Needs

By on January 10, 2018

Choosing a life insurance policy can be a tricky endeavor. You are likely to encounter a number of different policies such as term life, permanent life, universal variable life, whole life and much more. How is one to make sense of all the different types of life insurance policies and know that you’re making the best choice for your family and budget?

Before settling on a specific life insurance policy you must analyze your family’s needs (both current and estimated need after your passing). Compare your finances and needs to the various types of life insurance policies (review offers from several companies to compare costs). In the meantime, learn more about these policies and how to determine which one is best for you.

Here is a quick breakdown of the most common types of insurance policies along with the advantages and drawbacks of each:

Term Life Insurance

Term life is exactly as it sounds: the policyholder purchases life insurance for a specific term or set period of time – 10, 15 or 30 years, and pays premiums for the entire length of the term. There is no cash-value, investment component so the entire premium payment is used to keep the policy active. And once the term is up, the policy expires and the death benefit is gone. This is what makes term life insurance less expensive than other life insurance products.

Various Types of Term Life Insurance:

  • Level Term – The premium and death benefit amount is locked in and remains the same for the entire length of the term.
  • Decreasing Term – The premium amount remains the same however the death benefit decreases each year. Decreasing benefits may save money if the policyholder only needs coverage for a diminishing principle on a mortgage loan or a child reaching close to adulthood.
  • Annual Renewable Term – The death benefit amount is locked-in throughout the term, but the policy is renewed annually, giving premiums a chance to increase each year. *Note: Initial premiums may be cheap, however they may become more expensive over the term.
  • Convertible Term – This policy that can be converted into a cash-value policy at the policyholder’s request or after a set term period regardless of your medical history.

Advantages of Term Life Insurance

Term life policies are usually less expensive than permanent life insurance policies (whole, universal, or variable life), with specific coverage periods allowing the holder to buy only as much coverage as they need. Terms may be offered by 10, 15, 20, 25, and 30 years. Excellent for policyholders in need of with life insurance while they have dependents or a mortgage to pay.

Disadvantages of Term Life Insurance

The premium payments are applied towards the policy and do not earn interest or a cash-value investment component. If you do not draw upon the benefits of the policy at the end of the term the premium payments are essentially lost. In addition, if the policyholder decides to extend their coverage after the term, they may be required to undergo proof of insurability; this could lead to a denial of coverage or significantly higher premiums.

Permanent Life Insurance – Whole & Universal

The various types of permanent life insurance are typically comprised of two parts: an investment, cash-value component and an insurance component. Due to the savings element, the policy premiums can be quite expensive.

The most important feature of a permanent life policy is that the policyholder can take out a loan against the cash-value being built up in the policy. With permanent life insurance, a part of the premium is invested by the insurance company and accrues interest; once a significant amount of value has accrued, the policyholder can borrow against the value of the saving element. And the money can be used for pretty much any purpose: college tuition, buying a home, retirement, etc..

Permanent life insurance can help individuals protect their families while providing a hedge against inflation, an avenue for income and a way to protect some assets from tax burdens. Let’s take a closer look at three permanent policies Universal, Variable, and Whole life insurance.

Universal Life Insurance

Universal life insurance is a bridge from term life policies with the addition of a cash-value component. These insurance policies also allow the purchaser to set the premium and the death benefit; unlike whole life insurance in which premiums are set by the insurance company based on long-term interest rates and actuarial tables predicting the period of time over which the premiums will be paid.

Policyholders may reduce or increase the death benefit and pay premiums at any time and in any amount (subject to certain limits) after the initial premium payment. You may also increase the face value of your insurance coverage (however a medical examination is necessary to qualify for this benefit). And when it come to the insurance component, you have two options – a fixed amount of death benefit or an increasing death benefit equal to the face value of your policy, plus your cash value amount.

Various Types of Universal Life Insurance:

  • Standard Universal Life – Gives consumers flexibility premium payment schedules, death benefits and the cash-value component of their policy.
  • Indexed Universal Life – Offers death benefits and a cash-value component with the potential for higher interest rates (above a standard policy’s fixed interest rate), which is linked to the performance of one or more market indices.
  • Variable Universal Life – Policyholders do not earn a specific rate of interest in a cash-value fund, but instead can choose to invest this portion in a variety of different investment vehicles such as mutual funds.

Advantages of Universal Life Insurance

Universal life insurance provides policyholders with savings and flexibility to make payments, use their cash-value component or alter their insurance benefits.  Indexed Universal Life provides protection to the policyholder’s cash-value component adjustable interest rates, less administrative fess and insurance costs. Variable Life also gives the policyholder control over their investment decisions made with their cash-value portion. And typically, these policies cost less than Whole Life.

Disadvantages of Universal Life Insurance

Universal Life can be more expensive than Term Life. And although Variable Life gives the policyholder investment options, there is no guarantee and the investment could be lost to market turndowns anyhow. In addition, a drop in the cash-value could induce higher premiums to keep the contract active.

Whole Life Insurance

Whole life insurance also includes a cash-value component, however, unlike Universal Life, the premium and death benefits are fixed. The insurance company guarantees a specific death benefit as long as the policyholders pays set premiums. And investment earnings are set by the company based on the overall return on its investments on a tax-deferred basis.

The cash-value of the policy beyond the amount required to cover the death benefit can be borrowed against to make premium payments, reach other long-term financial goals or received as dividends (paid in cash or kept aside to accumulate interest). These policies are an excellent way to reach long-term financial responsibilities or income needs without sacrificing death benefits for your loved ones.

Advantages of Whole Life Insurance

Whole Life offers policyholders a guaranteed premium, interest rate, and death benefit for the life of the policy. The cash-value grows tax-deferred and allows for withdrawals and loans against the policy, which makes Whole Life an excellent tool for high wealth individuals to protect their families and build tax-deferred income. In addition, the cash-value component tends to be less exposed to risky losses due to market fluctuations.

Disadvantages of Whole Life Insurance

Whole life tends to be more expensive and less flexible than both Term and Universal life insurances. And the interest earned for the cash-value component may be less than is possible to earn in other high risk-high return investment vehicles.

Get Help From an Insurance Professional

As you can see, there are numerous life insurance options available and comparing policies is not an easy task. Analysis will require preparation, patience and industry knowledge which few consumers can do on their own. A qualified insurance professional can help you assess your insurance needs, conduct a cost-benefit analysis of similar policies and help you choose the right policy for your current AND future financial situation(s). Shop around for someone who is qualified and trustworthy.

With the right insurance agent, you can be sure to get an insurance policy which is suitable for you and your loved ones.

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About Scott Ho

FSN insurance and retirement journalist - Planning for your retirement or understanding your insurance needs can be confusing and difficulty. Scott knows these tasks can seem daunting. He offers his experience to make choosing insurance coverage and planning for your golden years a successful endeavor. Connect with Scott at !

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