Whole Life insurance, as the name implies, is a plan designed to provide protection over your entire lifetime. You pay one, fixed annual premium amount over the life of the policy period and your survivors receive a guaranteed amount of money upon your death. By design, Whole Life policies have more built-in guarantees in terms of death benefits and cash values as a result of paying the scheduled premiums. The cash value of your policy accrues over time and it is possible to use dividends and cash values to help fund your future premium payments. It is also possible to increase the value of the death benefit by utilizing the dividends to purchase paid-up additional insurance.
A Universal Life Insurance policy provides more flexibility because, within limits, you can determine how much premium to pay into the policy from year to year and adjust the amount of the death benefit, up or down. You may even skip a premium payment as long as the cash value is sufficient to cover policy charges. The build up of cash value within the policy is a function, in large part, of how much premium is paid into the policy. This premium can be adjusted to meet both cash value and death benefit goals. In general, Universal Life plans have fewer guaranteed elements than Whole Life policies but offer more flexibility.
Variable Life Insurance can be purchased as either a Whole Life or Universal Life policy with you, the policyholder, directing the policy’s accrued cash value into various mutual funds. This means that you—not the insurance company—incur the risk of the investments, but may ultimately enjoy a higher return and greater death benefit. (With Whole and Universal Life policies, all investments are controlled by the insurance company and any interest credited or dividends paid are based solely on the insurance company’s investment results.)
Unlike Whole, Universal and Variable Life policies, a Term Life Insurance policy does not build up any cash value over time. Similar to auto or homeowners insurance, a Term policy buys protection one year at a time. A death benefit is paid only if you die within a period of time covered by the policy—not throughout your whole life. Typically, Term Life policies are sold with level premium periods ranging from 10 to 30 years. Because no cash value accrues—and you are paying solely for insurance—the cost of a Term policy is considerably less. People interested in buying the greatest amount of protection for the lowest price, for a limited period of time, often find Term Insurance to be a good choice. Note: Most term plans can be converted to a Whole or other permanent life insurance plan without the policyholder undergoing medical examinations or having to prove insurability.
A Mortgage Life policy is simply a Term Insurance policy that ensures mortgage pay-off in the event of premature death. It is sometimes required by lenders and is designed to match the amount and term of the mortgage. Because you are the owner of the policy, you retain the right to make changes to the policy in the future.