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Different Types of Life Insurance

April 20, 2022

Life Insurance: Term, Universal, and Whole Life

Life insurance often comes in a variety of forms to better cover your specific circumstances. While you may think that the main difference between policies is the length of time, different lines of life insurance come with different benefits. The goal of this blog is to help you understand the differences between the three major lines of life insurance, and how a policy is important to the foundation of any financial plan.

The difference between term, universal, and whole life insurance

Before deciding on the right policy for you, it’s important to understand the different kinds of insurance. Below, we will explain the key differences, and benefits of term, universal, and whole life insurance.

Term life insurance

Term life insurance guarantees a death benefit if the person covered by the policy passes away during a specified period, also referred to as the level premium period. The insured will pay a fixed premium amount for a specified period of time, and if anything happens to the insured while the coverage is active, his or her beneficiaries get the death benefit. Once the level period is done, the insured typically does not get any of the money put into the contract back (unless specific riders are added to the coverage).

Throughout the level premium period, the client has the right to convert to a permanent policy without any additional medical underwriting. This can help lock in “insurability” even if a client’s health deteriorates causing them to be table rated, or worse, denied for coverage later in life, when replacing an expiring term contract.

These kinds of policies can last 10, 15, 20, 25, or even 30 years (some companies now offer even longer-term periods) and are perfect for younger clients with children as this can be a more affordable coverage while at a younger age.

Universal life insurance

Universal life insurance policies offer permanent life insurance at a flexible premium. Unlike term life insurance policies, this means that you can adjust your premiums overtime depending on the performance of the policy and money the client has available to deposit into the contract. Universal life also has a cash value building component that is not found on term coverage.

There are various ways to build cash value in the universal life policies; variable, indexed and fixed. Depending on the cash value growth potential the client would like to achieve will depend on what specific UL policy is right for them.

Universal life insurance is perfect for clients who want more flexibility and control over their premiums and coverage.

Whole life insurance

Whole life insurance policies come with a fixed premium and are guaranteed for life. Some contracts go all the way until age 126! There are ways to structure the WL policy, so the coverage is paid off after a period of time.

Majority of whole life companies are private companies. Instead of paying stockholders dividends, they will give these yearly payouts to the whole life policy holders. This further increases the amount of cash value found in a whole life contract. While these dividends are not typically as high of returns on an indexed or variable universal life, they tend to be more consistent. Some companies have been paying dividends to their policy holders for over 100 years in a row.

This kind of policy is for clients that want more structure to their premium payments and a more predicable cash value building strategy while maintain a guaranteed death benefit. Many of the dividend payment history can be found online, or through an insurance company’s website.

3 benefits of having life insurance

  1. Insurance as an asset

While term life insurance does not build any cash value, whole and universal life insurance do. UL and WL policies allow you to borrow, or withdraw, against the cash value in the contract. You may hear others refer to this as “borrowing against yourself”. One of the major benefits with borrowing from a life policy is the income generated is typically tax free (if the policy coverage remains in force). Borrowing against yourself can help with retirement planning or emergency financial planning if unforeseen circumstances were ever to arise.

  1. How insurance can help with future taxes

Another clear benefit of life insurance is that the insurance payout is completely tax-free. If you were to pass away, your death benefit will payout to your beneficiaries free of any income tax or capital gains tax. This makes life insurance the perfect tool to use for legacy planning or a family with a large amount of qualified retirement accounts (401k’s, IRA’s, etc.). In addition to the payout being tax-free, the cash value of your policy will also grow on a tax-deferred basis. Combine these two tax advantages with the fact that income from a life policies cash value can be tax free, and you can see what a life policy could be used to help higher income earners with income and estate planning.

  1. Accelerated underwriting processes make it easy to get covered

Also known as express underwriting, accelerated underwriting has made it a lot easier for people in good health to get life insurance. This enables you to get a life insurance policy with a high coverage amount without having to have a medical exam. Each company has different amounts they will insure to without having to do a physical.  

Many life insurance companies will require a variety of tests to sign off on your policy. While this is thorough, it does take a lot of time and can be a frustrating process. Therefore, you should always check to see if you are within the age range and fit the parameters to qualify for accelerated underwriting.

Please contact us to make sure that you have the proper life insurance coverage in your financial plan to cover any unforeseen circumstances. Aside from just being an insurance policy, we could set up a contract to add to an overall financial strategy as another asset.