Objective: At the end of the lesson, the student will be able to distinguish between term, whole, and universal life insurance.

Term, Whole, and Universal Life Insurance

When it comes to preparing for the inevitable, unfortunately, there isn’t simply a one-size-fits-all answer – but hey, that’s life! Instead, there are three main types of life insurance: term, whole, and universal.

Which policy to choose depends on needs and budget, and we’ll break down some of their characteristics so you can know when to recommend each of them. Let’s start with term life insurance.

Term Life Insurance

Term life insurance is the “temporary” option. Think of it like renting an apartment. You’re paying for a specific time period (such as 1, 5, 10, or 20 years) and if you pass away during that term, your loved ones get a payout. If instead you outlive the term, congratulations! No further “rent payments”, but also no payout (though some policies can be renewed or converted to a different type).

Term life is typically used to cover financial obligations with a known end date (such as kids growing up, or paying off a mortgage).

Given its temporary nature, term life is typically the budget-friendly choice, with lower premiums than the more permanent options.

Whole Life Insurance

Whole life insurance is a lifetime commitment. This one’s more like buying a forever home. Coverage is permanent, as long as the premiums keep getting paid. Those premiums are almost always higher than with term life, but are typically locked in at a fixed rate so you know exactly how much you’ll pay every month. No surprises here.

Whole life policies can also accumulate cash value over time, which can be borrowed against or even refunded if coverage is cancelled.

This option’s great for clients who’d prefer as close to “set it and forget it” as you’ll find.

Universal Life Insurance

On the other hand, universal life insurance is a type of whole life for clients who want control and flexibility. If whole life is like buying a forever home, universal life is like buying a house with a flexible mortgage that lets you adjust your payments and coverage as life changes.

As with whole life, universal life also accumulates cash value, which in this case is actually used to pay for the insurance. Any premium payments that exceed the cost of insurance go into the cash portion of the policy to earn interest. So growth scales with interest rates, and with a guaranteed minimum rate each year.

The key feature of universal life is flexibility. Clients can elect to pay additional, reduced, or even skip premiums completely, as long as there’s sufficient cash value to cover the insurance and administration costs. Death benefits can also be adjusted to suit a client’s insurance needs.

Scenario: Eleanor’s Insurance Conundrum

Eleanor, 35, wants to ensure near-future financial security for her family and two young children, but is also investment-minded and appreciates having control over her finances. 

With the three main options presented to her, how can she choose just one? Well, she doesn’t! Eleanor opts to enroll in term, whole, AND universal life policies for a comprehensive plan that evolves with her needs. Her mortgage and kids’ college expenses are taken care of with a 20-year term life policy, and she enjoys the lifelong peace of mind and investment potential of both the whole life and universal life policies.

Between these three insurance options, you can ensure that your clients are set for life, and beyond.