Thinking about life insurance is a complex, but highly important task. While it might be tempting to pick the least expensive solution, it’s important to do your homework first. Different types of life insurance provide different levels of benefits, flexibility and even investment opportunities.

In this article we’ll review the different types of life insurance to help you make an informed decision for you and your loved ones. After all, life insurance should be about creating comfort and financial security—not stress.

Types of life insurance: Term, whole life and universal life

Term life insurance

As the name implies, term life insurance is purchased for a specific number of years when there is a temporary need for insurance coverage. 

During a given term, you will pay a monthly premium, which is usually guaranteed. Most term insurance products are renewable and convertible, meaning they will renew at an increased amount at the end of the term, and may be converted into another insurance plan at a future time. 

Term insurance provides a defined death benefit for a set amount of time, commonly 10 or 20 years. It’s important to keep in mind that term insurance plans will often expire before the insured’s life expectancy.

Permanent life insurance—whole life and universal life 

Insurance that lasts from the day you purchase it until the day you pass away is called permanent insurance. It comes in two different forms, whole life and universal life.

Whole life insurance

As the name suggests, whole life insurance can provide protection for your entire life. The guaranteed death benefit will be paid out tax free to your beneficiaries. The premiums are also guaranteed. The policy may also have a cash value as the policy grows over time and this value can be accessed throughout the life of the policy. Whole life insurance policies typically have guarantees built in, for added security.

There is an important distinction within whole life insurance between non-participating and participating policies.

In a non-participating whole life insurance policy, there tends to be guarantees and locked-in amounts, coverage and surrender values. In a participating policy, there are several additional options, including an investment component. For the investment portion of a participating whole life insurance policy, payments are pooled in a separate account called the participating account with other policy owners. The funds are professionally managed and may provide you with a dividend. 

The ability to access the cash value of your policy can be helpful if needs arise during your lifetime. Policy dividends may be: used to purchase additional insurance; paid out to the policy owner as income; kept on deposit with the insurance company; or, used to reduce your scheduled premium. 

Whole life policies have two great benefits:

• Participating whole life policies can provide a good rate of return over time. Also, the death benefit your beneficiaries receive is tax free.
• You can build up a cash value that can be used during your life. You can borrow against the value of the policy to fund things like education or your retirement. When you die, the tax-free death benefit can be used to repay any remaining debt owing.

In summary, whole life policies are suitable for individuals who:

• Want a set premium and benefit throughout their entire lifetime.
• May want access to the cash value of the insurance policy during their lifetime.
   

Universal life insurance

Universal life insurance policies are another form of permanent life insurance. Similar to a whole life policy, universal life insurance can be paid off before the end of your life, builds a cash value (often referred to as an accumulation fund) and can be part of your overall investment strategy. 

You select your investments within a universal life insurance policy. Investment returns can accumulate tax free, within limits set by the government. You can also withdraw and borrow from your policy, with certain tax implications. 

The key difference between whole life and universal life is the investment component. Universal life allows the owner to choose their own investments while whole life policy investments are managed by the insurance company. 

There is a higher degree of policy flexibility with universal life—at policy setup and during policy lifetime versus whole life—but this is not the key difference.

A universal life insurance policy might be the right choice for you if you’re looking for:

• Flexibility to change your premium payment or death benefit throughout the course of your life.
• The chance to be hands-on with your investment strategy.
   

Choosing the right life insurance for you

Overall, your life situation will help determine the best life insurance policy for you. 

For example, term insurance might be a good option if you have 10 years left on your mortgage and you want the peace of mind that  your loved ones could cover payments if you were to die within that period of time.

Whole life insurance could be beneficial if you want to have a set premium payment that is guaranteed and provides coverage for your entire life. It has an investment function that allows you to access the cash value of the policy. 

Universal life insurance provides flexibility, allowing you to scale up or down your premium or death benefit as your need or health status changes. It also has an investment element to help accumulate wealth. 

For more information about life insurance or to find the best policy for you and your loved ones, talk to an insurance advisor.