Understanding Insurance Types

Term insurance provides life insurance coverage for a particular period of time for a specified premium. For example, a $100,000 20-year term policy for an annual premium of $1,000 is a contract that allows you to protect your beneficiaries for the next 20 years. At the end of 20 years, the coverage either ends, or you can continue the coverage at a much higher premium.

Universal life insurance is a form of “permanent” lifetime insurance. You’ll pay a higher premium for that $100,000, but you’ll have so much more flexibility. The insurance company will create a “cash value” account in this policy, and offer a guaranteed minimum interest rate on the growth. Part of your premium is used to pay for the annual cost of insurance, and the other part goes into a growing cash account that you can access at any time. Other benefits include:

1)  Adjustable coverage, so you can increase or decrease the death benefit as your needs change.

2)  Flexible payment options, so you’ll be able to increase, decrease, or even stop your premium payments as your circumstances change.

3)  Growing cash value, so you’ll have a “bank account” inside your policy that you can access for emergencies, college expenses, supplemental retirement income, or any other cash needs you may have.

Universal life can provide you with a variety of different payment options, including a flexibility of changing your death benefits, as well as the potential to accumulate cash value over time. Here’s how:

Since there is a cash value component, you may be able to skip premium payments as long as the cash value is enough to cover your required expenses for that month

Some policies may allow you to increase or decrease the death benefit to match your particular circumstances.

In many cases you may borrow against the cash value that may have accumulated in the policy

The interest that you may have earned over time accumulates tax-deferred

Whole Life Insurance Benefits

Whole life policies offer you a fixed level premium that won’t increase the potential to accumulate cash value over time, and a fixed death benefit for the life of the policy. In addition:

Any cash value growth is tax-deferred (as it is with universal life)

Whole life may allow you to make withdrawals and loans against the policy

Whole life offers the ease of budgeting for a regular and consistent premium payment every month

Understanding Key Differences

The flexibility that a universal life policy provides is a key differentiator over whole life. As a result, universal life insurance premiums are typically lower during periods of high interest rates than whole life insurance premiums, often for the same amount of coverage.

Another key difference would be how the interest is paid. While the interest paid on universal life insurance is often adjusted monthly, interest on a whole life insurance policy is normally adjusted annually. This could mean that during periods of rising interest rates, universal life insurance policy holders may see their cash values increase at a rapid rate compared to those in whole life insurance policies.

Some people may prefer the set death benefit, level premiums, and the potential for growth of a whole life policy. However, for those who would prefer to have more flexibility and options when it comes to their permanent life insurance, then universal life might be the better choice.

Jim Collins

Florida Licensed Insurance Agent

617-905-6411