Understanding term life insurance vs. whole life & universal life

Shopping for life insurance? One of the first things to decide is whether you want a term life, whole life, or universal life insurance policy.

Understanding the differences between these 3 common types of life insurance will help you select your coverage with greater confidence.

What is term life insurance?

Simply speaking, term life insurance is a temporary life insurance policy that lasts for a predetermined amount of time. Some common term length options include 10, 15, 20, 25, and 30 years. Exact term options can vary from one insurance carrier to the next. The policy pays out death benefits if the insured dies during the coverage term. Otherwise, the coverage expires at the end of the term with no money returned to the policyholder.

Term life insurance tends to offer the lowest initial cost to protect your family and loved ones, offering affordable coverage. However, these policies generally do not carry any cash value, so they don't accumulate savings over time.

Generally, term life insurance is best for younger people who have significant but temporary financial expenses that would need to be covered if the policyholder were to pass away. This may include younger newlywed couples, adults with young children and mortgages, and individuals with large amounts of debt.

What is whole life insurance?

Whole life insurance is a kind of permanent life insurance. Rather than coverage lasting for only a set term, a whole life insurance policy is designed to remain in place for the remainder of the policyholder’s life. Whole life policies include an investment component, where the policy can grow in cash value over time (with taxes deferred until the money is withdrawn).

Compared to term life insurance, whole life insurance coverage is more expensive because it lasts until the insured dies, rather than potentially ending without paying out a death benefit.

Typically, a whole life insurance policy is best for those who want to cover permanent financial needs, including funeral and burial expenses, as well as income replacement. It is also ideal for those who are in the process of creating an estate plan and want to ensure that their dependents are covered with death benefits down the road. These policies offer lifelong coverage with a fixed premium that never rises and benefits that don’t change. This means that as long as all premiums are paid on time, death benefits are guaranteed.

What is universal life insurance?

Another permanent life insurance option is universal life insurance. A universal policy (also known as flexible premium adjustable life insurance) is a policy that allows you to make changes to your benefits and other aspects of your policy while it is active. 

This makes it a flexible option for those whose finances or earnings fluctuate or change over time. Universal life insurance policies also include a cash value that can grow over time at a fixed or variable rate, with different options for collecting death benefits down the road. Like whole life insurance, a universal policy is intended to stay in place until the insured’s passing.