Term Life Insurance
Term life insurance offers a death benefit in exchange for a premium. Your premium payments build NO accumulated cash value, but guarantee you a death benefit in the case of a claim. Term life is a policy for a fixed period of time, typically 10, 15, 20, 25, or 30 years. The majority of term life policies are “level premium” policies, meaning the premium you pay remains fixed. Term insurance is often used to protect against obligations which remain constant for a short or intermediate period of time, for instance, your income prior to retirement or during a minor’s dependency, or for the duration of your mortgage. Newer term life policies offer living benefits or the ability to access cash benefits during the Insured’s lifetime in the event of certain conditions such as chronic, critical or terminal illnesses.
Whole Life Insurance
One big difference between term and whole life insurance is that your policy can build cash value that is tax-deferred. Your cash value will typically increase based, in part, on the insurance company’s general asset account performance. This product is used for longer-term obligations, for instance, surviving spouse lifetime income needs, estate liquidity, or to help fund retirement needs. Generally with whole life, there are guaranteed provisions that relate to premiums, cash value and the death benefit.
Universal Life Insurance
Universal life (UL) insurance contracts differ from traditional whole life policies by specifically separating and identifying the mortality, expense, and cash value elements of a policy. With whole life the mortality and expense portions of the policy are not separated for the policyholder to “see.” Dividing the policy into these three elements allows the insurance company to build a higher degree of flexibility into the contract. This flexibility allows (within certain limits) the policy owner to modify the policy face amount or premium, in response to changing needs and circumstances. Think of UL as permanent insurance that combines term insurance with a cash account (cash value) that earns tax-deferred interest. While some UL policies offer a credited interest based on the carrier’s general asset account performance, other UL policies can base their credited interest rate, in part, on the performance of a specific index (ie, the S&P Index) or some combination of industry recognized indexes. UL policies, like whole life, typically offer different riders to address various needs of the policy owner. One very important UL rider that should be considered, if available, is a long term care rider.