Under a life insurance plan, you agree to pay premiums to an insurance company, and the insurance company agrees to pay benefits to a beneficiary that you name when a certain event occurs - usually, your death. Life insurance benefits can help support you during your life or support your dependents after you die. The terms of whole life and term life insurance policies differ widely.
Whole Life Provides Broader Benefits
Under a term life insurance policy, your policy lasts for a set time, such as 20 years. If you die within that time, the policy will pay your beneficiary the "death benefit" listed in your policy. By contrast, a whole life insurance policy remains in force until you die. It pays a certain amount at your death, but it also includes a "cash value" component, meaning a portion of your premiums is invested by the insurer and earns interest. You can withdraw the cash value of your policy or use it as collateral to borrow money. The portion of your premiums used to fund the cash value isn't taxed until you cash it in.
Universal Life Insurance Allows You to Vary Your Premiums
Universal life insurance is a type of whole life insurance. It differs from a traditional whole life policy because you can change the amount of your premiums that fund the policy's cash value and thus raise or lower your premiums within limits. Universal life insurance offers two options: the death benefit can remain the same unless you change it, or it can equal a fixed amount plus the policy's cash value at the time of your death.
Variable Life Allows You to Manage Your Investments
Under a variable whole life insurance policy, you can target your policy's cash value to particular investments. You may dedicate some of the cash value portion of your premiums to a mutual fund, for example, and dedicate some to purchasing bonds. Your policy may allow you to change your investments several times a year. If you fail to invest wisely, your policy's cash value could fall to zero. However, the minimum death benefit stated in your policy will remain the same.
Alternatives Are Available
Many life insurance companies offer hybrid whole life insurance policies, such as universal variable life. Universal variable life offers features of both universal and variable life. You can raise and lower your premiums, and you can target your policy's cash value to specific investments. Adjustable whole life insurance allows you to raise and lower your premiums and increase or decrease your death benefits. However, your insurance company will re-evaluate its risk if you apply to increase your death benefits, and it may deny your application.
An Insurance Lawyer Can Help
The law surrounding whole life insurance policies and claims is complicated. Plus, the facts of each case are unique. This article provides a brief, general introduction to the topic. For more detailed, specific information, please contact an insurance lawyer.