Question

How do term, whole life, and universal life insurance differ? What are the advantages and disadvantages of each policy?

Answer 1

Difference Between Term, Whole Life and Universal Life Insurance Policies:

1. Whole life insurance policy provides lifetime coverage.If one keeps on paying the premium, the death benefit will be guaranteed to the beneficiary. With each insurance premium payment, the cash value increases and hence this policy provides insurance coverage and savings. Universal life insurance policy , sometimes also known as adjustable life insurance policy provides flexibility benefit. Part of premium paid goes into an investment account. Term life insurance policy guarantees payments in case the insured dies within a specified period of time.

2. In a whole life insurance, the premium amount remains consistent with a guaranteed cash value accumulations whereas the universal life insurance includes variable or flexible premiums and death benefits. Term Insurance policy also includes fixed premiums but only for a specific period of time.

3. Premium payments can be stopped for some time in Universal life insurance but the same cannot be done in term or whole life insurance policy.

4. Universal life insurance policy is more risky to interest rate changes than whole life insurance policy and term insurance policy.

Advantages of Whole Life Insurance Policy

1. Guaranteed Cash values upon premium payments. Cash value can also be surrendered to make early withdrawals in case of any emergency.

2. Lenders easily provide loans against Whole life insurance policies as collateral.

3. Multiple premium payment options are offered by insurance companies as per needs of policy buyer.

Advantages of Universal Life Insurance Policy:

1. One can increase, reduce or stop the premium payments based on need. This can prove to be vital in periods of financial difficulties.

2. Partial Withdrawals are permitted from cash value.

3. Increase in death benefit as part of premium is transferred in investment account which can offer higher returns.

Advantages of Term Life Insurance Policy:

1. Cheaper alternative as compared to whole life insurance policy.

2. Well suited for individuals who need insurance coverage for a temporary period.

Disadvantages of Whole Life Insurance Policy:

1. Policy is quite expensive when compared with term insurance.

2. Premiums cannot be paused or stopped for some time if policy holder faces periods of financial distress.

Disadvantages of Universal Insurance Policy:

1. Policy Value might get severly affected due to adverse market conditions. This may prove to be risky for the policyholder.

2. Charges high fees on withdrawals from cash values.

Disadvantages of Term Insurance Policy:

1. Provides coverage only for a specific period of time and no death benefit if policyholder dies post insurance period.

2. Often does not include savings or investment option along with life insurance.