Term vs. whole life vs. universal vs. variable - what is the best type of life insurance to have?


To answer this question let us first examine those 4 types of life insurance with their pros and cons and who they are suitable for.

Term Life Insurance

This type is considered the simplest to understand among the general categories of life insurance policies. The word 'term' refers to the time period that the insured has insurance coverage. The appeal of this type of life insurance has to do with its low cost while still offering the consumer sufficient coverage.

  • Term Life Insurance Advantages – these policies come cheaper compared to whole, variable and universal policies. Because they offer coverage over a specific time period, a consumer can purchase just enough to cover his or her needs. For instance, a consumer can buy a term that is enough to cover mortgage payments.

  • Term Life Insurance Disadvantages – does not have cash value. Premium payments are solely for insurance coverage and does not earn nor accumulate interest. The term itself can be a disadvantage. For instance, a consumer buys a 20-year policy. After the 20-year period, he decides he wants an extension of the coverage. By that time he would be required to show proof that he is still insurable. Failure to do so may lead the company to deny him the extension or it may grant him that but at a much higher cost.

Whole Life

Whole life offers entire life coverage to the insured as long as he meets the premium payments in a timely manner. Premium rates are higher than term policies especially at the beginning of coverage, but these tend to go down later on. In certain cases, term life policies can be converted to whole life policies.  Whole life policies have a cash value feature which offers potential for tax-deferred growth. 

  • Whole Life Advantages – Premium payments, death benefit and interest rates are guaranteed. The accumulated cash value grows under a tax-deferred status. The policyholder can withdraw or borrow against the cash value component. Whole life insurance is also accepted as loan collateral by many banks.

  • Whole Life Disadvantages – Can be much more expensive compared to term as well as universal life insurance. The cost difference is brought about by the additional guarantees this policy type offers. Whole life policies are also known for not being flexible. The policyholder cannot increase his or her coverage by increasing or decreasing his premium amounts. Also, the rate of interest you get are usually lower compared to other investment vehicles.

Universal Life

Universal life is similar to a whole life policy but offers flexibility in relation to the savings component of whole life. The insurance carrier will set aside part of the premiums for investment. The company will guarantee a minimum return and the funds will be afforded tax-deferred status. The flexibility feature comes in the choice of death benefit – it can either be a pay out of the cash value, or, it can be face value of the policy plus accumulated cash value. Choice number one costs less as the provider will make a lesser payout. Choice two costs more because of the higher payout.

  • Universal Life Advantages – The flexibility feature allows the policyholder to defer premium payments by using the cash value to cover the payments. The death benefits can also increased or decreased. Loans are allowed against the policy.

  • Disadvantages of Universal Life – Costs more than term life policies. The rates of return are not be best available to the policyholder; other forms of investments can offer better rates.

Variable Universal Life Insurance

This type of life insurance is a mix between life insurance and an investment account. The variable feature comes in when the policyholder gets to decide how much of the premium will be allocated for investment purposes. This policy is considered partly an investment. Hence, SEC regulations are applied and policyholders are to be provided with a prospectus.

  • Variable Universal Life Advantages – the growth in funds is tax-free. There is a guarantee on the minimum amount for death benefits for as long as the minimum premium payments are made. It also allows flexibility in investing decisions. Making wise decisions can lead to significant earnings that are tax-deferred.

  • Variable Life Disadvantages – Bad market performance can impact the investment portion of the policy. A decrease in the policy's value can lead to additional premium payments. Expenses related to the investment aspect of the policy can be much higher than that of other types of investment vehicles.

Which type of insurance is most suitable for you?

Who is term life insurance for? Who is whole life insurance for? Who is universal life insurance for? Who is variable universal life insurance for?

Suitable for those who are looking for temporary coverage over a specified time period and those who have a tight budget.

Can be a great choice for those looking for permanent protection at fixed premium payments.

The fixed amount means there is a guarantee that it will not increase during the policy term.

Suitable for those who want to accumulate cash value while having   flexibility with the premiums and the death benefit.

The flexibility feature allows a consumer to have a policy that is modified to fit his or her specific objectives.

Best suited for those who have maximized their 401(k)s and similar  retirement plans. Also recommended for those who intend to hold it for life. Consumers considering term insurance and a variable annuity may be better off with a VUL.

Which life insurance policy is better for long term?

There is no single answer that can address every consumer's long term coverage needs. An individual has to assess his situation and consider his goals for overall financial planning, his economic value to his loved ones and his plans for his surviving family.

Generally, the step involves calculating one's economic value, which is the value of future earnings over the individual's lifetime. To do this, one has to consider current and future earnings, the number of years one plans to continue working until reaching retirement, the expected rate of return on one's assets and investments, and the economic value that one looks to serve as replacement in the event of death. Figuring this out may require the guidance of a trusted life insurance agent.

What is the best type of life insurance for young people?

Term life insurance is best for young people who have no dependents. These are individuals who have less than 20 years to go until they reach their 30th birthday. Getting a term policy which carries an option for renewal or conversion is also recommended.

What is the best type of life insurance with investment value?

It would depend on one's current situation and future financial goals.

  • If you want growth that follows a set schedule where you are aware of the cash value of the policy each year, then go for whole life coverage.
  • If you are looking for a policy that offers a fixed rate of interest or one that will never go below a certain rate, then the universal life policy may serve you best.
  • If you want the most opportunity for growth, the variable universal life policy will offer you a chance to be tied to stock market performance. As your investments grow with the market, your policy's cash value will also see growth.
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