Insurance

The Basics of Whole life insurance, Universal life insurance, and Term life insurance

If you are new to buying life insurance, then it is important to learn how it functions and understand what’s important and what’s not, when it comes to deciding your insurance coverage. While the death benefit offered by all the life insurance plans is usually income tax-free, the policies’ features and benefits are different.

What is Life Insurance?

A life insurance policy is a contract between an insurance buyer and an insurance company for a pre-decided period of time. As per the contract, the insurance buyer agrees to pay a stipulated premium. In exchange, the insurer offers a lump-sum payment i.e. a death benefit, to the nominee upon the insured’s demise.

Life insurance ensures that the insured’s family leads a financially secure life in case of his sudden demise. We can’t predict what life holds for us, but we can always plan our finances in such a way that our dependents live their lives with dignity

Basically, a life insurance plan is slected on the basis of the insurance expectations and financial goals of the insurance buyer. As one’s insurance needs are different, so are the insurance benefits. There are various life insurance plans available in the insurance market. In this article, we will tell you the basics of whole life insurance, universal life insurance, and term life insurance.

Whole Life Insurance

Whole life insurance is formulated specially to offer permanent life insurance coverage. Since the coverage provided spans a lifetime, whole life insurance comes with higher premium payments. Keeping other benefits in mind, the premiums are totally worth it. The insurance premiums are fixed and have a cash value. Over a period of time, the premiums act as a savings component.

The Benefits of Whole Life Insurance

It can be used as an excellent tool for estate planning and preserving the legacy you want to pass to your beneficiaries.

Universal Life Insurance

Universal life insurance is formulated to offer permanent life insurance. The best thing about universal life insurance plans is that they come with the much-need flexibility that allows a policyholder to increase or decrease his/her insurance premium or coverage throughout his/her lifetime.

As a result, due to its benefits and lifetime coverage, universal life insurance comes at higher insurance premium.

The Benefits of Universal Life Insurance

Universal life insurance acts as a component of a flexible estate plan and helps preserve the legacy the insured wishes to pass on to his/her beneficiaries. Additionally, universal life insurance offers income replacement, beyond the working years. A few of universal life insurance providers offer plans designed to provide a death benefit coverage and build a cash value.

Term Life Insurance

True to its name, term life insurance offers insurance coverage for a stipulated period of time such as 10 years or 20 years. For traditional term insurance, the premium remains the same for the opted coverage tenure.

After completion of the tenure, some insurance companies continue to offer insurance coverage. Usually, the extended coverage comes at a higher premium. Since term life insurance offers insurance coverage for a stipulated period of time, it generally comes at less expensive insurance premium.

The Benefits of Term Life Insurance

Term life insurance is a helpful tool for income replacement during working years of an insured. The plan provides a safety shield for the beneficiaries. It helps ensure the family’s financial goals such as keeping a business running, paying for children’s college, paying off a mortgage etc. will be met.

Though term life insurance can be used as a replacement of the lost potential income, the insurance benefits are paid as a one-time payment i.e. lump sum. It means the beneficiary won’t get insurance benefits on a regular basis.

Whole life insurance Vs. Universal life insurance Vs. Term life insurance

For your better understanding, the difference between whole life insurance, universal life insurance, and term life insurance are highlighted below.

S.No. Basis Whole life insurance Universal life insurance Term life insurance
1. Protection Tenure The coverage is offered for a lifetime. Generally, the coverage is offered for a lifetime. The coverage is offered for a specific tenure.
2. Premium Typically, the premium is fixed. The premium is flexible. Typically, the premium is fixed
3. Affordability Generally, it is more expensive than term insurance. Generally, it is more expensive than term insurance. Typically, it is less expensive than other kinds of life insurance.
4. Equity Buildup Yes Yes No
5. Features It helps accumulate/preserve and transfer wealth to the beneficiaries. It helps protect income, transfer wealth to the beneficiaries. It helps provide a replacement of income during the insured’s working years.

How is the premium computed?

Life insurance providers compute premiums based on various components such as rate classes, risk-related categories etc. These components don’t affect the amount or tenure of insurance.

The rate class is affected by various factors such as the overall health of the insured, how active his/her lifestyle is and the medical history of his/her family. Smokers are bound to pay higher insurance premiums because smoking exposes them to additional risk. As a result, their insurance premium is higher than non-smokers.

In a Nutshell

We hope that now you have a clearer idea of the basics of whole life insurance, universal life insurance, and term life insurance. While it might look like there is a thin difference between whole life insurance, universal life insurance, the offered insurance coverage is not the same. Based on offered insurance coverage, insurance premiums are computed.

Before opting for an insurance plan, you should analyze your insurance expectations and financial goals. Then, go for the plans that fit the bill. Don’t go for a plan only because your colleagues or friends recommend it. It’s not guaranteed that if a plan suits them, it will suit you as well. If your insurance expectations and financial goals are different from your friends, your opted insurance type/plan must also be different. Before finalizing an insurance company, make sure that the company is ‘A’ rated and is doing well financially.