Types of Policies

Answers in the types of policies topic.

• Term vs. whole vs. universal vs. final expense life insurance: what's the difference?

  Term life insurance covers you for a fixed period (for example 10, 20, or 30 years) and pays a death benefit only if you die during that term — it has no cash value. Whole life is permanent coverage with fixed premiums and a guaranteed cash value that grows on a set schedule. Universal life is also permanent but more flexible: premiums and death benefit can be adjusted, and cash value grows based on interest rates or, in indexed universal life (IUL), a market index formula. Final expense insurance is a small whole-life policy — typically a few thousand to around $25,000 — designed to cover funeral and burial costs.

• How does term life insurance work?

  Term life insurance covers you for a fixed period — commonly 10, 15, 20, or 30 years. If you die during the term, your beneficiaries receive the death benefit; if you outlive the term, coverage ends with no payout and no cash value unless you renew or convert. Because it has no cash-value/investment component, term is the lowest-cost way to buy a large death benefit, and many term policies are renewable and/or convertible to permanent coverage.

• How does whole life insurance and cash value work?

  Whole life is permanent coverage that lasts your entire life as long as premiums are paid, with level (fixed) premiums and guaranteed cash value that grows tax-deferred and can be borrowed against or withdrawn. Because it combines lifelong protection with a savings component, whole life costs substantially more than term for the same death benefit. Participating whole life policies may also pay non-guaranteed dividends.

• What is universal life and indexed universal life (IUL)?

  Universal life (UL) is permanent insurance with flexible premiums and an adjustable death benefit, whose cash value grows based on interest the insurer credits. Indexed universal life (IUL) credits cash value based on a market index like the S&P 500, subject to caps and floors, while variable universal life invests the cash value in subaccounts that carry market risk. UL offers flexibility but must be monitored so the policy stays adequately funded.

• What are common life insurance riders?

  Riders are optional add-ons that customize a policy. Common ones include the accelerated death benefit (access part of the death benefit if you become terminally or chronically ill), waiver of premium (premiums waived if you become disabled), child term rider, accidental death benefit, return-of-premium, and guaranteed insurability. Some riders are included at no cost while others add to the premium.

• What are living benefits in life insurance?

  Living benefits let you access part of your policy's value while you're alive rather than only paying out at death. The most common is the accelerated death benefit rider, which lets a terminally or chronically ill policyholder receive a portion of the death benefit early; permanent policies also build cash value you can borrow against or withdraw. Accelerated death benefits paid to the terminally or chronically ill are generally income-tax-free under IRS rules (confirm specifics with a tax advisor).

• Can you borrow against a life insurance policy?

  Yes — permanent life insurance policies (whole life, universal life, and IUL) that have accumulated cash value allow you to take a policy loan, using the cash value as collateral. There is no credit check and no fixed repayment schedule, but the insurer charges interest on the loan, and any outstanding loan balance plus interest is deducted from the death benefit if the insured dies before it's repaid. Loans generally are not taxable while the policy stays in force, but a lapse or surrender with an outstanding loan can trigger a taxable event.

• What is cash surrender value?

  Cash surrender value is the amount the insurer will pay you if you cancel (surrender) a permanent life insurance policy: your policy's cash value minus any surrender charges and outstanding policy loans. In early policy years, surrender charges can be steep, so the surrender value can be much less than the cash value shown on your statement. If the surrender value exceeds the total premiums you paid (your cost basis), the gain is taxable as ordinary income.