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By Paul Schrodt
March 10, 2020
Kiersten Essenpreis for Money

Few if any types of insurance are less talked about yet so critical than life insurance. Its significance is right there in the name: If the unfortunate fate we don’t like to talk about suddenly and unexpectedly befalls you, life insurance is there to ease the process for all those around you after your passing.

We don’t like facing down potential doom, but digging into the details of life insurance policies is paramount to getting optimal coverage. And as with any insurance, there are a lot of details to consider. Whether you’re contemplating the options provided through your employer or other offerings on the private market, just the basic different forms of life insurance are enough to make you feel deeply uncertain.

What universal, whole life, and term life insurance actually mean

What are those different forms of life insurance? They split into three vaguely named categories: universal life insurance, whole life insurance, and term life insurance.

But you’re better off thinking of “two overall types of insurance,” says Lauren Silbert, VP and general manager of The Balance. “One is permanent—or until you die—and one is temporary. Universal and whole life insurance are permanent. Term life insurance is temporary,” lasting as long as the time period for which you signed up.

“Term life insurance is really common and often the type your company might offer to you as a benefit,” Silbert adds, usually extending around 5-30 years.

With any of these plans, it’s important to note, the same basic mechanism stays in place: While a plan is active, if the policyholder dies, a payout goes to a beneficiary (or beneficiaries) that he or she previously assigned.

The advantages of permanent life insurance are pretty self-evident. These insurances remain intact as long as the policyholder is alive and paying the annual premiums. Another way to look at this: If you die just after the expiration date of term life insurance, your loved ones get nothing.

The supreme affordability of term life insurance

That dedication, however, comes at a hefty cost. “Term life insurance isn’t just less expensive than whole—it’s a lot less expensive,” notes Allison Kade, the editorial director at Fabric, a site and app geared toward connecting parents with life insurance policies.

In some cases that could mean term life insurance that’s “close to 20 times less expensive,” she adds. “A 30-year-old, non-smoking man in excellent health in Washington, DC, might get a quote of $460-plus per month for $500,000 of coverage on a whole life policy, according to a quote we got from State Farm, and only $24 a month” for similar coverage though on a 20-year term through Fabric.

Fabric focuses on term policies, believing that if “you’re looking to help protect the people who depend on you financially during the time they need you most, such as while you’re raising young kids, term life insurance is the simplest and most affordable way to do that,” Kade says.

The other pros of whole and universal life insurance

While they come with much steeper premiums, universal and whole life insurance have other distinctive advantages. They’re also by no means the same thing.

“The major benefit” of permanent policies other than longevity, according to Silbert, “is that they accumulate a cash value over time [with a set amount of interest] so you’re able to borrow against it.” In other words, you could access that cash in the form of a withdrawal or loan or even use it to pay down premiums (exact terms will depend on the specific insurance company and plan).

Whole life insurance is the most solid, and by the same token the most locked-in, option. Its “premium rates do not change over time, so they guarantee a strict payout,” Silbert says.

“Universal life is similar to whole, with more flexibility,” Kade says, meaning the exact death benefit and the amount and frequency of premium payments may be adjusted (subject to terms of the contract).

Premiums along with cash value on universal life can rapidly rise or drop with market conditions. But this avenue sometimes make sense for those who don’t want to predict their exact financial situation years ahead of time. (Though, again, if precarious finances are a significant concern, term life insurance may ultimately be the way to go.)

So which life insurance plan is right for you?

“Having any type of life insurance is a good choice to protect your loved ones from undue hardship after you die. So if you’re just choosing between types, good job,” Silbert says.

When it comes down to the brass tacks of buying a plan, it’s crucial to shop around—and do so with both immediate and long-term goals in mind. If you’re attracted to the security of life insurance “but you’re not able to contribute a lot of capital to a policy right now, term life insurance may be for you,” Silbert adds. “Just remember you’re usually at your healthiest when you’re younger, and premiums can change dramatically based on your age and health.”

On the other hand, “if you’re ready to contribute to a more guaranteed policy and think the cash value of a permanent policy is a good investment vehicle for your personal situation, you should consider whole or universal life.”

It’s smart to think of such an investment as part of a broader portfolio. Sturdy investments in stocks, bonds, and mutual funds have their own unique upsides for the future even when death isn’t in the equation.

Of course, if your brain is still feeling scrambled by the possibilities, know that there’s help.

“Find a financial adviser that you trust and have them take you through all of your options and potential scenarios,” Silbert suggests. “They have explored so many different situations for their clients, and they can usually clarify any questions you will have.”

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