Pros:

Term Insurance initially costs less than other insurance policies mainly because, unlike other policies, it builds no cash value. Term insurance provides the most coverage dollar for dollar. Term Insurance is great for young families, or any family with large financial needs and a tight budget.

Cons:

Term Insurance premiums increase with age because the risk of death increases as people get older. Yearly Renewable Term Insurance premiums may rise each year, or after the initial guarantee period of 5, 10, 15, 20, 25 or 30 years. Over the age of 65, the cost of Term Insurance becomes very expensive, often unaffordable. Additionally, Term Insurance does not build a cash value so it cannot be used to cover other expenses. Avoid Term Insurance if you are looking to add assets to your portfolio.

Permanent Insurance

Universal Life

Pros:

Universal Life gives you the flexibility to adjust the death benefit as your needs change, as well as the flexibility to pay smaller or larger premiums – depending on your financial circumstances. This is often an important feature for families who may have fluctuations in their ability to pay.

Cons:

If your premium payments are too small for too long, the policy could lapse, leaving you without insurance protection. Also, if the insurance company does poorly with its investments, the interest return on the cash portion of the policy will decrease (but never below the minimum interest rate guaranteed in the contract). In this case, cash values will probably fall, forcing you to pay more premium in the later years.

Variable Life Insurance

Pros:

Allows you to participate in various types of investment options while not being taxed on your earnings (until you surrender the policy). You can apply interest earned on these investments toward the premiums, potentially lowering the amount you pay. Variable Life Insurance offers the highest risk as well as the highest reward, and is best for families without dependents.

Cons:

You assume the investment risks. When the investment funds perform poorly, less money is available to pay the premiums, meaning that you may have to pay more than you can afford to keep the policy in force. Poor fund performance also means that the cash and/or death benefit may decline, though never below a defined level. Also, you cannot withdraw from the cash value during your lifetime.

Whole Life Insurance

Pros:

Whole Life Insurance has a savings element (cash value) which grows tax-deferred. If the contract is set up properly in advance, you might build up enough cash value to stop paying premiums by a certain age, or to borrow from the cash value (take a policy loan) during your lifetime on a tax-advantaged basis. Unlike Term Life Insurance, whose premiums eventually rise after the initial guarantee period, Whole Life Insurance premiums will not increase during your lifetime (as long as you pay the planned amount and repay any policy loans). This policy is good for older families that are unlikely to significantly alter their future plans.

Cons:

You are not allowed to choose separate investment accounts, i.e., money market, stock or bond funds; the insurance company controls how and where your premium dollars are invested. Whole Life Insurance offers no premium flexibility or face amount flexibility; the plan you buy today remains fixed for life. It is therefore important to plan carefully, because Whole Life Insurance is not very good at adapting to insurance and/or retirement plans that change significantly.

Variable-Universal Life Insurance

Pros:

Variable-Universal Life offers premium and death benefit flexibility, as well as the potential to increase cash value based on the performance of your choice of underlying funds. Because it is tied to the performance of various securities markets, it may provide an important hedge against inflation. This can help keep the value of your life insurance policy from eroding due to rising costs of living. It also allows you to withdraw money or to borrow from the policy during your lifetime. Better for younger policyowners with long-term investment horizons.

Cons:

Variable-Universal is more expensive than other types of Permanent Life Insurance. Premiums must be high enough to cover the cost of insurance, mortality and expense charges, and expenses associated with the underlying funds. You must have at least a basic understanding of stocks, bonds and securities. You must read and understand the prospectus before investing. You will be responsible for managing the underlying investment accounts.  The policy’s success is dependent on the investments you make, and may lose value.

Permanent insurance combines a death benefit with a cash value, or savings component, which grows tax-deferred. Many policyholders borrow from the cash value to pay for things such as a college education, or convert their cash value into a retirement fund.

Because of the savings component, permanent life insurance may cost more than term life, especially at the beginning. But the premium remains fixed for the life of the policy.

Many people are familiar with the saying “buy term and invest the difference,” which suggests going for the lower premiums and taking care of the savings component on your own rather than counting on the insurance policy for investment growth. Various types of permanent insurance plans, however, do give the insured the option of deciding how the savings is invested, and if you let the insurance company take care of the investment, there is usually a minimum interest which diminishes the risk of investment.

While term insurance often starts out cheaper, permanent life offers several advantages over a term policy, financial experts say. Because premiums don’t escalate, a permanent policy is more likely to be held until death and actually pay a death benefit than is a term policy, which can get quite expensive as the insured ages. And the death benefit will pass to beneficiaries tax-free. There’s a tax advantage to permanent life, because cash values will grow at a tax-deferred rate. With no cash value, there’s no tax advantage to term life. If you go with cheaper term insurance, you should make a commitment to a regular savings and investment program.

Variable Universal Life Insurance blends the features of Variable Life and Universal Life, offering a choice of underlying investment accounts, flexible premiums and adjustable death benefit. The amount of the death benefit may rise or fall, depending on the success of the underlying investments you choose. Because the stock market has traditionally performed well over long periods,this offers the opportunity to build up significant cash value. However, if you die when values are down, these policies guarantee that a minimum death benefit will still be paid to your beneficiaries. This policy gives you the most control of the cash value portion, which means that the policyowner assumes all the risks inherent in the underlying securities investments. Variable-Universal Life products are therefore regulated by Federal securities laws and the SEC, and must be sold with a prospectus.

Pros:

Variable-Universal Life offers premium and death benefit flexibility, as well as the potential to increase cash value based on the performance of your choice of underlying funds. Because it is tied to the performance of various securities markets, it may provide an important hedge against inflation. This can help keep the value of your life insurance policy from eroding due to rising costs of living. It also allows you to withdraw money or to borrow from the policy during your lifetime. Better for younger policyowners with long-term investment horizons.

Cons:

Variable-Universal is more expensive than other types of Permanent Life Insurance. Premiums must be high enough to cover the cost of insurance, mortality and expense charges, and expenses associated with the underlying funds. You must have at least a basic understanding of stocks, bonds and securities. You must read and understand the prospectus before investing. You will be responsible for managing the underlying investment accounts.  The policy’s success is dependent on the investments you make, and may lose value.

Whole Life Insurance is permanent life insurance protection for your entire life, usually to age 100. A Whole Life policy is contractually guaranteed not to lapse, provided that you pay sufficient premiums each year to keep the policy in force. Whole Life Insurance features a savings element that allows you to build cash value on a tax-deferred basis. A portion of the premiums you pay build up the savings element of the policy and are invested by the company. The interest rate return on your investment is added to the savings portion of the policy. This is how the policy builds cash value. In addition to crediting your policy with interest, some policies issued by mutual insurance companies may also give you the opportunity to earn dividends. Dividends are distributed by mutual insurance companies when they operate at a profit. They are not guaranteed but they offer extra incentive to choose a whole life policy.

Pros:

Whole Life Insurance has a savings element (cash value) which grows tax-deferred. If the contract is set up properly in advance, you might build up enough cash value to stop paying premiums by a certain age, or to borrow from the cash value (take a policy loan) during your lifetime on a tax-advantaged basis. Unlike Term Life Insurance, whose premiums eventually rise after the initial guarantee period, Whole Life Insurance premiums will not increase during your lifetime (as long as you pay the planned amount and repay any policy loans). This policy is good for older families that are unlikely to significantly alter their future plans.

Cons:

You are not allowed to choose separate investment accounts, i.e., money market, stock or bond funds; the insurance company controls how and where your premium dollars are invested. Whole Life Insurance offers no premium flexibility or face amount flexibility; the plan you buy today remains fixed for life. It is therefore important to plan carefully, because Whole Life Insurance is not very good at adapting to insurance and/or retirement plans that change significantly.

Variable Life Insurance provides permanent protection to your beneficiary upon your death. This type of life insurance is “variable” because it allows you to allocate a portion of your premium dollars to a separate account comprised of various investment funds within the insurance company’s portfolio. The value of the death benefit and the cash value may fluctuate depending on the performance of the investment portion of the policy. Although most variable life insurance policies guarantee that the death benefit will not fall below a specified minimum, a minimum cash value is seldom guaranteed. Variable is a form of whole life insurance and because of investment risks it is also considered a securities contract and is regulated as securities under the Federal Securities Laws and must be sold with a prospectus.

Pros:

Allows you to participate in various types of investment options while not being taxed on your earnings (until you surrender the policy). You can apply interest earned on these investments toward the premiums, potentially lowering the amount you pay. Variable Life Insurance offers the highest risk as well as the highest reward, and is best for families without dependents.

Cons:

You assume the investment risks. When the investment funds perform poorly, less money is available to pay the premiums, meaning that you may have to pay more than you can afford to keep the policy in force. Poor fund performance also means that the cash and/or death benefit may decline, though never below a defined level. Also, you cannot withdraw from the cash value during your lifetime.

Universal Life Insurance, also called “Flexible Premium Adjustable Life Insurance,” is a more flexible version of Whole Life Insurance. Like Whole Life, Universal Life Insurance features a savings element that grows on a tax-deferred basis. A portion of your premiums are invested by the insurance company in bonds, mortgages and money market funds. The return on the investments is credited to your policy tax-deferred. A guaranteed minimum interest rate applied to the policy (usually around 4%) means that if the investments perform well, you can earn more than the minimum rate, but it can never fall below the minimum rate. Universal Life allows you to choose from two death benefit options. Option A pays the death benefit out of the policy’s cash value; the more cash value you build up means the company is on the hook for less insurance (and therefore costs less). Option B pays the face amount stated in the contract, plus any cash values you accumulated over the years (costs more). Many Universal Life Insurance policies today offer a no-lapse guarantee: as long as you pay the minimum designated premium, the policy will stay in force to age 100 (usually). However, the minimum guaranteed premium is rarely sufficient to build up significant cash values.

Universal life insurance is very flexible with its premium payments. Under a Universal Life Insurance Policy, the policy owner has complete freedom concerning how much premium to pay and when to pay it. If the policyowner wants to reduce the premium for a whole life insurance policy, it is necessary to reduce the face value of the policy through a partial surrender of the policy. Unfortunately, this can result in the release of cash value to the policyowner and possible income tax liability. Universal life insurance policies unlock the connection between premium, face amount and cash value.

Despite the premium flexibility, of universal life insurance, there are certain rules that apply to premium payments. Although a policyowner may choose to pay no premium into the policy on a particular premium-due date, any payments that are made must meet a certain minimum to help the carrier to manage the costs of premium collection and processing.

The universal life insurance target premium is generally the amount of premium that will keep the policy in force for the insured’s lifetime. There is, however, no guarantee that the universal life insurance policy will remain in force for that period if only the target premium is paid. In fact, there is no guarantee that the universal life insurance policy will remain in force regardless of the premium level that is maintained by the policy owner.

The maximum premium is the largest permitted premium that will enable the universal life insurance policy to maintain its character as life insurance. If you pay additional premiums, then the policy will be considered a “Modified Endowment Contract” or MEC. MECs lose much of the tax advantages of life insurance.

No Lapse Guaranteed Universal Life Insurance Policies have a defined premium level at which the carrier guarantees that the policy will remain in force even if the cash value should dip below zero and the policy would otherwise lapse.

A Brief Overview of Universal Life Insurance: 

Universal Life Insurance is a more flexible version of Whole Life Insurance. Universal policies offer flexible premium payments, cash value, and death benefits. These three aspects of the policy can be changed to meet the policyowner’s needs at any point in time.

You can choose to use the cash value of the policy to pay your premiums (option A) or the cash value can be added to the death benefit (option B). Option A is less expensive but option B provides more benefits.

Pros:

Universal Life gives you the flexibility to adjust the death benefit as your needs change, as well as the flexibility to pay smaller or larger premiums – depending on your financial circumstances. This is often an important feature for families who may have fluctuations in their ability to pay.

Cons:

If your premium payments are too small for too long, the policy could lapse, leaving you without insurance protection. Also, if the insurance company does poorly with its investments, the interest return on the cash portion of the policy will decrease (but never below the minimum interest rate guaranteed in the contract). In this case, cash values will probably fall, forcing you to pay more premium in the later years.

Term Life Insurance is temporary life insurance protection for a specified period of time-usually to age 65. This is the simplest and most common form of life insurance in the US. Dollar for dollar, Term life insurance offers the most coverage because it is simply providing financial protection in the case of accidental death. There is no cash value that can be withdrawn so term life policies have lower premiums and a low cost of insurance. Under a Yearly Renewable Term policy, the premium is determined at the time you apply and increases at each policy anniversary (as you get older, it becomes more expensive to insure your life). Under a Level Term policy, remains level during initial guaranteed period and then increases dramatically. Term Insurance pays a specific lump sum to your designated beneficiary if you die within the period covered by the policy. The policy protects your family by providing money to replace your salary, and to cover immediate expenses incurred by your death such as funeral expenses and medical bills.

Pros:

Term Insurance initially costs less than other insurance policies mainly because, unlike other policies, it builds no cash value. Term insurance provides the most coverage dollar for dollar. Term Insurance is great for young families, or any family with large financial needs and a tight budget. 

Cons:

Term Insurance premiums increase with age because the risk of death increases as people get older. Yearly Renewable Term Insurance premiums may rise each year, or after the initial guarantee period of 5, 10, 15, 20, 25 or 30 years. Over the age of 65, the cost of Term Insurance becomes very expensive, often unaffordable. Additionally, Term Insurance does not build a cash value so it cannot be used to cover other expenses. Avoid Term Insurance if you are looking to add assets to your portfolio.