Term life insurance policies provide for life insurance coverage for
a specified term of years for a specified premium. The policy does not
accumulate cash value. A term life insurance policy is generally
considered pure insurance, where the premium buys protection in the
event of death and nothing else. Term insurance premiums are typically
low because both the insurer and the policy owner agree that the death
of the insured is unlikely during the term of coverage.
Whole Life or Permanent life insurance Coverage
Whole life insurance provides for a level premium, and a cash value
table included in the policy guaranteed by the company. The primary
advantages of whole life are guaranteed death benefits, guaranteed cash
values, fixed and known annual premiums, and mortality and expense
charges will not reduce the cash value shown in the policy. The primary
disadvantages of whole life are premium inflexibility, and the internal
rate of return in the policy may not be competitive with other savings
alternatives.
Universal Life Insurance Coverage
Universal life insurance - UL - is a relatively new insurance
product intended to provide permanent insurance coverage with greater
flexibility in premium payment and the potential for a higher internal
rate of return. A universal life policy includes a cash account.
Premiums increase the cash account. Interest is paid within the policy
or credited on the account at a rate specified by the insurance company.
This rate has a guaranteed minimum but usually is higher than that
minimum. Mortality charges and administrative costs are charged against
and reduceed the cash account. The surrender value of the policy is the
amount remaining in the cash account less applicable surrender charges,
if any. But universal life has its own disadvantages which stem
primarily from this flexibility. The policy lacks the fundamental
guarantee that the policy will be in force unless sufficient premiums
have been paid and cash values are not guaranteed.
