Individual Life Insurance

The Three Basic Types of Life Insurance “Pros” and “Cons”

Term Life

Term life insurance covers you for a set period of time, called the policy term, which begins and ends on specific dates. For example, a ten-year policy term would provide coverage for ten years. Benefits will be paid only if you die within that time.

Pros:

Often provides the greatest amount of insurance for the lowest amount of premium.
Flexible policy period (can usually buy for 1, 10 or 20-year term).
The death benefit is not taxed.
May be convertible to whole life or other type of permanent insurance without evidence of insurability.

Cons:

Is more difficult to buy and more expensive if purchased when you are older, because the odds of dying increase as you age.
Once the term ends, you must renew or lose your insurance. The premiums on the renewal policy are likely to be much higher than the premiums on your original policy, especially if your health has deteriorated.
Has no cash value and does not pay interest or dividends.

Whole Life

Whole life insurance is a kind of permanent insurance that stays in force for your whole life (unlike term insurance), as long as you pay the premiums. Whole life insurance combines a death benefit with a cash savings feature. Part of each premium goes to pay for the death benefit, part to pay the insurer’s expenses and profit, and part is placed in an account that accumulates interest over time. You may borrow against the policy’s cash value by taking a policy loan to meet unexpected expenses.

Pros:

Premiums generally don’t increase with age.
Protects you your entire life (if kept) and is not subject to non-renewal.
Cash values are guaranteed and you can take out a loan against the policy or surrender it for cash.
Cash values grow on a tax-deferred basis; you pay taxes on interest and earnings only when they are withdrawn.
The death benefit is not taxed.

Cons:

Higher cost initially than term life.
Long term commitment required.
Dividends can be reduced by low interest rates.
Cash value accumulates slowly during the first few policy years, so you may lose much of your money if you surrender the policy within 3-5 years from the time of purchase.

Universal Life

Like whole life insurance, universal life offers both permanent insurance protection and a cash value element. With universal life, your premium is placed into an investment fund managed by the insurance company. Each month, the cost of a term insurance policy and the insurer’s administrative costs are deducted from that account.

Pros:

Maximum flexibility: policyholders can vary the amount and timing of premium payments, and the amount of coverage.
Investment component earnings are tax-deferred.
Cash value: you can take out a loan against the policy or surrender it for cash
The death benefit is not taxed.

Cons:

The cash value of the policy and the size of the premiums are closely tied to prevailing interest rates, and may fluctuate according to the general financial climate.
Premiums can rise as you get older.
Because administrative costs are front-loaded, cash values build slowly during the initial policy years and you may lose much of your money if you surrender the policy within 3-5 years from time of purchase.