Term Life Term life insurance, is a temporary insurance policy, that has a fixed death benefit. The policy will pay the benefit, provided death occurs within the time period of the policy. The term can be one, five, 10, 20 or even 30 years. The policy does not provide any additional benefits beyond this (the amount of insurance purchased); the policy has no additional cash value, unlike permanent life insurance policies, which have savings accumulation, increasing the value of the policy and its eventual payout.
These types of policies are low in cost, usually renewable and sometimes convertible to permanent life insurance.
Whole Life Whole life insurance policies, accumulate wealth with regular premium payments that are to cover the death benefit, while also contributing to a savings account which grows equity. This account grows dividends or interest, tax-deferred. Whole life products, protect an individual, for their entire life. These policies are also known as straight life, traditional or permanent whole life insurance.
With a whole life policy, the cash value can be borrowed against or withdrawn. The withdrawals will be taxed at the ordinary tax rate. Loans, if unpaid, will result in a lower death benefit for the beneficiaries.
Universal Life Whole life insurance and universal life insurance both are in the category of permanent coverage. The difference between them, are how they accumulate cash value. The company that issues the universal life insurance policy, establishes an interest rate minimum. That rate can be found in each universal contract. If the insurance company's investment portfolio, outperforms the minimum rate stated, the additional earnings are applied to the cash value of a policy. The ability to potentially earn more interest is what differentiates universal life from whole life insurance. While the cash value of the policy accumulates over time, policyholders have the ability to access a portion of it, without affecting the guaranteed death benefit. Life insurance policy loans are allowed to policyholders. They can borrow against the cash value of the policy without any tax implications. Any policy loans not repaid can reduce the death benefit issued to beneficiaries. The cash value can also be accessed as a withdrawal, although the policyholder may have a tax liability by doing so.