Life Insurance

Term Life Insurance

Term life insurance is temporary; it provides a death benefit for a specific term, such as 10, 20, or 30 years. Unlike other types of life insurance, it does not accumulate a cash value. If the policyholder dies during that term, their beneficiaries receive the benefit from the policy. When the contract ends, so does the coverage.

This limited term leads to term life insurance’s main advantage: price. Generally, term life insurance costs less than permanent life insurance, especially if the purchaser is younger. This has the potential to free up funds for other household expenses.

Permanent Life Insurance

Permanent insurance remains in place as long as the policyholder makes payments. In addition, permanent policies are designed to build up “cash value,” a cash reserve that accumulates with the policy. Typically, this cash reserve pays a modest rate of return. However, the policyholder has limited access to the funds.

Variable Universal Life Insurance

Variable universal life insurance is permanent life insurance—it remains in force for the policyholder's whole life. And, as with universal life insurance, it provides a flexible premium and an adjustable benefit—meaning the policyholder decides how much to put in the policy above a set minimum. By extension, the policyholder also determines the face amount of the policy.

The difference between variable universal life insurance and other types of permanent insurance is that the policyholder directs how premiums are invested. This provides access to the potentially higher returns provided by the financial markets. It also means returns could underperform those provided by other life insurance products.

Like other types of permanent life insurance, policyholders can even borrow a portion of their policy’s cash value under fairly favorable terms. And interest payments on policy loans go directly back into the policy’s cash value.*

When the policyholder dies, his or her beneficiaries receive the benefit from the policy. Depending on how the policy is structured, benefits may or may not be taxable.

*Generally, loans taken from a policy will be free of current income taxes provided certain conditions are met, such as the policy does not lapse or mature. Keep in mind that loans and withdrawals reduce the policy’s cash value and death benefit. Loans also increase the possibility that the policy may lapse. If the policy lapses, matures, or is surrendered, the loan balance will be considered a distribution and will be taxable.

Accessing the cash value in your insurance policy through borrowing—or partial surrenders—has the potential to reduce the policy’s cash value and benefit. Accessing the cash value may also increase the chance that the policy will lapse and may result in a tax liability if the policy terminates before your death.

Whole Life Insurance

In exchange for fixed premiums, an insurance company promises to pay a set benefit when the policyholder dies, but also offers additional benefits as well. Whole life insurance policies can build up cash value — effectively a cash reserve that pays a modest rate of return, and the growth is tax-deferred. Guarantees are based on the claims-paying ability of the issuing company.

Most whole life insurance policies allow policyholders to borrow a portion of their policy’s cash value. Access to the cash value can allow you to pay for things like college expenses, a home down payment, or any other needs you may have. Interest payments on policy loans go directly back into the policy’s cash value.

When the policyholder dies, his or her beneficiaries receive the benefit from the policy. Depending on how the policy is structured, benefits may or may not be taxable.

*We do not offer tax advice, please consult your tax professional.