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.
