Many people are torn between the benefits offered by term life insurance and those offered by whole life insurance. They appreciate the affordability of term life. However, they also like its flexibility. Term life policies can be canceled with no significant penalties, and new ones started for different death benefits and different premium amounts.
On the other hand, whole life offers something term life does not: coverage until death. The policy will not expire after a certain number of years, as it will with term life, so the consumer never reapplies for coverage. As a result, coverage cannot be denied later in life due to age or poor health. The premiums will not rise, either. Because of these guarantees, however, whole life is not flexible. The death benefit and premium amount are fixed at the time the contract is signed.
The solution for many people is universal life insurance. Universal life has been described as a hybrid between term life and whole life, but that is a misnomer. Universal life insurance is a type of whole life insurance, period. It offers greater flexibility and a lower cost than traditional whole life. Still, it shares whole life’s chief characteristics: permanent coverage, premiums that do not change based on age or health, and cash value accumulation.
The chief distinction between term life and whole life is the duration of coverage. With a standard term life policy, the coverage is limited to a specific time frame-the term. At some point, either the policyholder expires, or the coverage does. If the policyholder dies during the term, the death benefit is paid to the beneficiary. If the policyholder outlives the term, the coverage will cease on the policy end date. Some term life is renewable without a physical examination, but premiums increase based on the insured’s age at the time of renewal. With the whole life, the coverage continues indefinitely until the policyholder dies. Universal life insurance shares this characteristic with whole life insurance. Thus, both are forms of permanent life insurance.
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A person can use a succession of term life insurance policies to gain coverage into his or her eighties or nineties. Each time a person renews a term life policy or applies for a new one, however, insurance costs go up due to the increased death rates among older people. For example, a 30-year-old man gets a twenty-year, $500,000 term life insurance policy for as little as $245 a year, assuming he is in excellent health, does not smoke, does not partake of extreme sports or hobbies, and does not travel to dangerous areas of the world. By contrast, a 60-year-old man in similar health and meeting the other criteria still must pay at least $2,525 a year for the same twenty-year, $500,000 policy. A 70-year-old will pay $10,680 a year for the same policy. If a person develops any health problems during the term, the term life insurance premiums stay the same. If the person does not have “renewable” term life insurance, then when the term expires and applies for new term life coverage, the premiums increase dramatically. If the person has developed or experienced a serious health problem, such as cancer or a heart attack, he or she may not be insurable at all.
The cost of permanent life insurance does not increase with the passage of time or changes in health. Coverage cannot be terminated, no matter what health problems the insured encounters. The guarantee of insurability accounts for the higher cost of permanent life insurance.
Another main difference between term life and whole life is that whole life offers savings features, while term life does not. Term life is “pure” insurance. It insures against death, and that is all. The whole life also ensures against death, but it also provides a mechanism for accumulating cash value or savings. Universal life also offers savings features.
Early in the life of whole life or universal life insurance policy, the cost of insuring against premature death is much less than the premium amount. Therefore, the insurance company deposits the excess amount–less the company’s profits and fees–into a tax-deferred savings account. This amount is known as “cash value.” The insurance company invests these funds. Proceeds from the investments are credited to the account, increasing the cash value. These funds are available to the policyholder in the form of a loan or as a withdrawal. If the policyholder cancels the policy, he or she receives the cash value as the policy “surrender amount.”
Universal life differs from whole life in the flexibility the policyholder has to make adjustments in the policy. The death benefit, premiums, and cash value accumulation are fixed at the outset with the whole life. With universal life, the policyholder can increase or decrease the premium amount (within limits) and increase or decrease the death benefit. For example, the policyholder can decrease the premiums should the beginning price become unaffordable. Conversely, if the policyholder wishes to build up more cash value or increase the death benefit, he or she can pay a higher premium.
With the whole life, the cash value accumulation rate is guaranteed. With universal life, the cash value accumulation is determined by the performance of the insurance company’s investments. If the investments perform well, the cash value increases more quickly than it would with a whole life policy. If the investments perform poorly, the cash value will grow more slowly or not at all. Because of the added risks of whole life insurance, it costs less than traditional whole life insurance.
Many consumers who want the guaranteed insurability of whole life but are afraid of being locked into fixed premiums or death benefits find universal life an ideal form of permanent life insurance.
An award-winning author of books for young adults, Bradley Steffens is a frequent contributor to online and print publications, including Discovery Channel Magazine, QScience Review, Gig, and Broker Agent Magazine. A copywriter with 25 years of experience, he creates website content for cloud desktop computing, health insurance, and homeowner’s insurance professionals. His most recent book, Ibn al-Haytham: First Scientist, is the world’s first biography of the medieval Muslim scholar known in the West as Alhazen.
