What is the difference between term, universal and whole life insurance? Which is the best way to go?

Public Comments

1. I know that term insurance you purchase for a set amount of time and is life insurance only. Meaning you pay into for that set amount of time and get back (atleast your family will) only in the event of death. Whole life insurance combines a term policy with investment options. The investments allow you to actually be able to borrow against your policy. I believe that universal life insurace is a kind of whole life but im not exactly sure. Hope it helps.
2. Term insurance is temporary insurance. Over long periods of time it is very expensive, over very short periods of time it is very cheap. I will explain why in a minute. Whole life insurance is permanent insurance, it covers you for your whole life (hence the name). It ranges from single payment whole life insurance, where you pay once and you are covered for life, to payments spread out over your entire lifetime. It's premium can be level, but some start with a low initial premium that jumps after five to twenty years depending on the contract. It is really declining term with the difference invested. Finally, there is universal life. It is a hybrid of the two. They give you an estimated premium amount, you can pay whatever you wish, subject to certain contractual minimum payments. Like whole life, it has cash buildup so you are buying declining term and investing the difference, unlike whole life you can be at risk if your payments work out to be insuffficient. The difference is the premium is flexable. Term insurance over long periods of time (basically to advanced old age) will cost you about 6 times the amount you are insuring, whole life will cost you a fraction of the face amount and usually becomes self funding in 10 to 20 years depending on the contract. In term insurance, you provide a small payment equal to your expected risk of dying plus insurance company costs minus expected earnings on the premium by the insurance company in terms of its investments. In whole life, and to a lesser extent universal life, you provide a larger payment. Over decades, the payment is split between cash value, company expenses, insurance costs and earnings by your policy credited to your account. To illustrate, imagine you have a $100,000 policy and you buy term at a young age. You send in premiums each year, and each year the premiums increase. If you die, your beneficiaries get $100,000. The counter example is a whole life policy. You buy it at the same age. Each year the premiums stay the same. After ten years of paying, the cash value equals the amount of premiums you already paid in. You break even. To make the calculation simple, lets assume the premium is $1000 per year. In year 10, if you die, your beneficiary is paid $100,000. Of that $100,000, $90,000 was money that was money that the insurance company covered and $10,000 was money you had covered. You shared the risk with the insurer so over time your premiums are lower. Imagine another ten years go by and you call up your insurance agent about cancelling the policy. You have been paying all these years and you would like to stop. He checks on your policy and the earnings are sufficient that it will pay for itself. You can keep the policy, never pay tax on the gain and have access to the cash value if you need it. Your twin with the term is simply out of insurance. If they invested the difference, they paid taxes on the gain every year. Permanent insurance (whole and universal) also come in two flavors, variable and traditional. In variable, the cash value varies with the stock and bond markets and you have a small family of mutual funds to invest the cash value with. In traditional, the company invests the money for you and credits you with your prorata share of the earnings. There is one other flavoring, participating and non-participating. In participating, usually sold by fraternals and mutuals, you own part of the insurance company, any profits you participate in. In non-participating, you have no claim on the underlying company any profits are kept by them.
3. Use term insurance if you are looking to have certain loans paid off if you pass away (mortgage, car loan...) Use Variable Universal Life insurance if you want coverage for the rest of your life. I would avoid true Whole Life as most companies no longer sell it and its very expensive.