What’s the Difference: Term, Whole, and Universal Life Insurance

Fundamentally, death benefits are for the living. We purchase life insurance so that, upon our death, funds will go to our beneficiaries. Whether we want to ensure that our final expenses will be covered or that our loved ones are left with a sizable amount of money to cover their own needs, life insurance is a solution that can provide peace of mind.

Once you’ve decided to buy a life insurance policy, it’s time to decide which kind you want. According to a 2015 industry study by LIMRA (Life Insurance and Market Research Association) and non-profit Life Happens, almost 40 percent of the population haven’t bought life insurance, or more of it, because they don’t know what type or how much to buy.

There are three types of life insurance policies: term, which is temporary, as well as whole and universal, both of which are permanent. The difference between term whole and universal life insurance is below.

Term life insurance

Term life insurance policies are purchased to cover a finite period of time, generally 10 to 30 years. If you pass away before the term period ends, beneficiaries receive face value. Although standard term life insurance is generally a lot less expensive than whole or universal insurance, there are some drawbacks.

Pros

• Less expensive premiums
• Can sometimes be converted to a permanent policy

Cons

• Once your term of coverage is passed, the death benefit goes away
• Doesn’t include a savings feature

There are many provisions that can change or enhance a term policy, depending on what the insurance company offers.

Whole life insurance

As a permanent form of life insurance, whole life insurance offers lifetime coverage.

Pros

• Fixed premiums
• Cash accumulation, which is tax-deferred
• Lifetime coverage

Cons

• Higher premiums
• Rate of return can be lower than you’d get from other investments
• Surrender charges leveled if policy is cancelled
• Provider decides how excess premiums are invested

Universal life insurance

Like whole life, universal life insurance is a permanent policy that offers lifetime coverage. One of the differences is that universal policies are adjustable, in that you can make premium payments at any time in any amount.

Pros

• Lifetime coverage
• Flexible premiums
• Flexible death benefit
• More transparency with fees

Cons

• When interest rates decline death benefits can drop
• When interest rates decline premiums may rise
• Provider invests excess premium payments

Although life insurance types generally follow these basic guidelines, particular features can vary depending on the insurance carrier. Consult with a company before deciding on what kind of policy is best for you.

For more details about different types of life insurance, see What Kind of Life Insurance Do You Need?