Understanding the Three Basic Types of Life Insurance: Term, Universal and Whole Life

While there are many different aspects of life insurance policy design that you’ll want to understand before you take out a policy, the most fundamental thing to know is the difference between term insurance, universal insurance and whole life insurance.

Term Insurance
Term life insurance provides a death benefit if the insured passes away during a certain time frame specified within the policy. While the policy may have some added benefits attached (such as spouse or child coverage riders) there is no cash value associated with the policy, so there is no surrender value if it is terminated.

Because term life insurance covers a specified time period and has no cash value accumulation, it’s less expensive than other types of life insurance. Most people use this type of life insurance to cover a specific period of time such as to cover the 30-year term on their mortgage or to cover the period of time while their children are still dependents.

Whole Life Insurance
While a term policy only pays a death benefit if death occurs in a specified time period, a whole life policy will provide a death benefit for life—as long as premium payments are made on time. Additionally, the policy has level premiums and will accrue cash values, which grow tax-deferred at a guaranteed rate. Once the cash values reach the same value as the death benefit (usually around age 100) the policy will mature (or endow) and the value will be paid out to the owner.

Universal Life
Much like a whole life policy, a universal life policy is meant to provide death benefit protection for the insured’s entire life. The major difference between the two is that universal life policies offer some flexibility in death benefit and premium. Cash values for universal policies grow tax-deferred based either on prevailing interest rates or their growth may be tied to the performance of a chosen index. With underwriter approval, you can increase the death benefit of the policy so that it includes the cash value portion. You can also reduce your premiums over time—even stop paying them altogether—if your cash values grow sufficiently. Because interest rates can rise and fall, it’s important to continually monitor the cash value performance to ensure that future plans to stop paying premiums can be supported.

There are now many other types of life insurance policies as well such as those linked to investments, those that provide long term care benefits, UL policies with no-lapse guarantee riders, or other hybrid products. At Kramer Wealth Managers we can help you sort through the many options and design the best life insurance policy for your needs and expectations. Contact us today to make an appointment.

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Adrianna Rocha

Client Relations Representative

240-379-6929 V
240-439-6889 VP
512-379-6909 FAX

Adrianna Rocha joined Kramer Wealth Managers in 2021.

Adrianna is responsible for client experiences and service. As part of the customer service team, she strives to help and provide top-notch service to our clients. As part of her role, she communicates with clients through videophone, schedules client meetings, prepares and processes forms, and gathers information for our advisors.

Adrianna Rocha graduated with a Bachelor of Arts in Communication Studies from Gallaudet University in 2017. Before she joined our team, she worked in the customer service industry for nearly a decade. She excels in human-to-human relations and takes pride in not only her own accomplishments, but her clients’ as well. Adrianna enjoys chatting about her slight obsession with dogs, houseplants, essential oils, and food: especially Mexican food! She is also a proud fur-mama to her beautiful Aussie-mixed pup, Ziva.

Adrianna is not registered with Osaic Wealth.