Term Life Insurance:
As the name suggests, Term Life Insurance provides coverage for a fixed period—typically 10, 15, 20, or 30 years. This is a temporary form of insurance that mainly offers a death benefit. If the insured person passes away during the term, the beneficiary will receive the payout. However, if the insured outlives the term, the policy usually expires without any payout.
Whole Life Insurance:
Whole Life Insurance provides lifelong coverage—remaining in effect until the insured passes away. Most whole life policies come with dividends, meaning that after covering the cost of insurance, the remaining premium is conservatively invested by the insurance company (e.g., in bonds). These investments may generate dividends, which are periodically distributed to the policyholder. However, the amount and frequency of these dividends are not guaranteed.
The pros and cons of whole life insurance are closely tied to the “lifelong” feature. On the one hand, it offers permanent protection; on the other, the guaranteed lifelong coverage makes the premiums significantly higher. Additionally, canceling the policy may result in surrender charges.
Because of the dividend component, some people view whole life insurance as a type of savings plan. However, the higher premiums and potential surrender charges may make it financially burdensome to maintain if the policyholder’s financial situation changes over time.
Universal Life：
Universal Life Insurance is similar to whole life insurance in that it provides lifelong coverage and includes a savings component. After covering the insurance cost, the remaining premium is placed into a separate savings account for investment. The key difference lies in flexibility—policyholders have more control over the premium amount, payment schedule, and sometimes even the death benefit. Insurance companies typically publish monthly interest rates for policy earnings.
The downside is that the return is often tied to prevailing interest rates. With recent increases in interest rates, returns may be more favorable than in past low-rate environments. However, returns can still vary, and if earnings fall short, policyholders may have to pay higher premiums over time just to maintain the policy.
Variable / Indexed Universal Life Insurance：
Variable and Indexed Universal Life Insurance are similar in structure to universal life, but with more investment options. Policyholders can choose from a selection of mutual funds or index-linked accounts offered by the insurance provider.
Indexed Universal Life (IUL): Tied to stock market indices (e.g., S&P 500), this policy offers capped returns (typically up to 13% depending on the insurer) but includes a guaranteed minimum return floor (often 0%). While this can appear to be a “safer” investment option, the increasing insurance cost with age and potential underperformance still require the policyholder to inject additional funds to maintain coverage.
Variable Universal Life (VUL): Returns depend on the performance of the selected funds. While there’s no cap on potential gains, there’s also no guaranteed floor. Poor investment performance may result in a loss of cash value, requiring the policyholder to pay additional premiums to keep the policy active.