Comparing the Different Types of Life Insurance
Term Insurance
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.