Life insur­ance pro­vides finan­cial pro­tec­tion for your loved ones when you die.  Essen­tial­ly, in exchange for your pre­mi­um pay­ments, the insur­ance com­pa­ny will pay a lump sum known as a death ben­e­fit to your ben­e­fi­cia­ries after your death. While this mon­ey can nev­er replace you, it can help your loved one(s) live the kind of life you hoped to provide.

Life insur­ance cov­er­age offers afford­able finan­cial pro­tec­tion and invalu­able peace of mind.  You can choose a legal enti­ty, orga­ni­za­tion or any­one to be your life insur­ance ben­e­fi­cia­ry.  You can name mul­ti­ple ben­e­fi­cia­ries and decide what per­cent­age they each will receive when you die.  Com­mon choic­es include:

  • Your spouse
  • Fam­i­ly members
  • Friends
  • A trust
  • Char­i­ta­ble organizations

You can cus­tomize your pol­i­cy to fit your family’s needs by choos­ing the type of pol­i­cy you buy, the num­ber of years you want it to last and your cov­er­age amount.  If you die while your life insur­ance pol­i­cy is active, your ben­e­fi­cia­ries can file a claim and the death ben­e­fit will be paid out to them.

There are two pri­ma­ry types of life insur­ance: term and per­ma­nent life. Per­ma­nent life insur­ance such as whole life insur­ance or uni­ver­sal life insur­ance can pro­vide life­time cov­er­age, while term life insur­ance pro­vides basic pro­tec­tion for a set peri­od of time.

Term life Insurance:

  • Term life insur­ance guar­an­tees pay­ment of a stat­ed death ben­e­fit to the insured’s ben­e­fi­cia­ries if the insured per­son dies dur­ing a spec­i­fied term.
  • These poli­cies have no val­ue oth­er than the guar­an­teed death ben­e­fit and fea­ture no sav­ings com­po­nent as found in a whole life insur­ance product.
  • Term life pre­mi­ums are based on a person’s age, health, and life expectancy.
  • Sim­plest and most afford­able type of life insurance.

Whole Life Insurance:

  • Whole life insur­ance lasts for a policyholder’s life­time, as opposed to term life insur­ance, which is for a spe­cif­ic num­ber of years.
  • Whole life insur­ance is paid out to a ben­e­fi­cia­ry or ben­e­fi­cia­ries upon the policyholder’s death, pro­vid­ed that the pre­mi­um pay­ments were maintained.
  • Whole life insur­ance pays a death ben­e­fit, but also has a sav­ings com­po­nent in which cash can build up.
  • The sav­ings com­po­nent can be invest­ed; addi­tion­al­ly, the pol­i­cy­hold­er can access the cash while alive, by either with­draw­ing or bor­row­ing against it, when needed.

Uni­ver­sal Life Insurance:

  • Uni­ver­sal life (UL) insur­ance is a form of per­ma­nent life insur­ance with an invest­ment sav­ings ele­ment plus low premiums.
  • The price tag on uni­ver­sal life (UL) insur­ance is the min­i­mum amount of a pre­mi­um pay­ment required to keep the policy.
  • Ben­e­fi­cia­ries only receive the death benefit.
  • Unlike term life insur­ance, a UL insur­ance pol­i­cy can accu­mu­late cash value.

How Do I Choose What is Right for Me?

It can be con­fus­ing to choose the right type of life insur­ance.  When you com­pare some of the biggest dif­fer­ences in life insur­ance, it is eas­i­er to choose.

The biggest dif­fer­ence in term life vs. whole life or uni­ver­sal life insur­ance is cov­er­age length.  Term life insur­ance is good for peo­ple who want a finan­cial safe­ty net for a spe­cif­ic num­ber of work­ing years, such as the years of pay­ing off a mort­gage.  Dif­fer­ent term lengths are avail­able such as 10, 15, 20 or 30 years.  Term life insur­ance is much cheap­er than whole life but if you out­live your term, there won’t be a life insur­ance pay­out. Term life is a sim­ple, inex­pen­sive way for you to proac­tive­ly take care of your loved ones so they don’t have to wor­ry when you’re gone.

Whole and uni­ver­sal life insur­ance give you cov­er­age for the dura­tion of your life. It also includes a cash val­ue com­po­nent. The biggest dif­fer­ence between whole life insur­ance and uni­ver­sal life insur­ance is the cost. Whole life insur­ance is gen­er­al­ly the most expen­sive way to buy per­ma­nent life insur­ance because of the guar­an­tees with­in the pol­i­cy: pre­mi­ums are guar­an­teed not to change, the death ben­e­fit is guar­an­teed and cash val­ue has a min­i­mum guar­an­teed rate of return. Whole life insur­ance is good for peo­ple who like pre­dictabil­i­ty and want life­long cov­er­age to build cash val­ue.  Your ben­e­fi­cia­ry will get a guar­an­teed life insur­ance pay­out as long as you’ve paid the pre­mi­ums to keep the pol­i­cy cur­rent. This type of pol­i­cy tends to cost more in the ear­ly years to sup­port the guar­an­tees it pro­vides.  But, as the cost of liv­ing goes up in the years ahead, your whole life insur­ance pre­mi­um will remain iden­ti­cal every month and will nev­er cost more.

Uni­ver­sal life insur­ance often offers more flex­i­bil­i­ty than a whole life insur­ance pol­i­cy.  These poli­cies offer life­long cov­er­age, pro­vide flex­i­bil­i­ty when it comes to pay­ing pre­mi­ums and choic­es for how the policy’s cash val­ue is invest­ed. A stan­dard uni­ver­sal life insur­ance policy’s cash val­ue grows accord­ing to the per­for­mance of the insurer’s port­fo­lio and can be used to pay pre­mi­ums.  With a uni­ver­sal life insur­ance pol­i­cy, the cash val­ue will build depend­ing on the pol­i­cy type.  If you want to build tax-deferred sav­ings and don’t expect to tap into the funds for a long time, uni­ver­sal life may be a suit­able option for you.

No one wants to talk about it, but we have to. You need life insur­ance. When you’re gone, those you love will be griev­ing. This is unavoid­able. Leav­ing them to strug­gle finan­cial­ly, how­ev­er, is avoid­able.  Talk­ing to a pro­fes­sion­al when you choose your life insur­ance plan can help you to find ways to afford the right kind of coverage.

Check out these great resources to bet­ter edu­cate your­self on choos­ing life insurance:

Term vs. Whole Life Insur­ance: How to Choose

Life Insur­ance Basics

8 Smart Steps for Buy­ing Life Insurance