At some point, we’re all going to die, and while this isn’t the most pleasant thought, it is wise to start planning now for how to cover inevitable costs.

There are few circumstances in which you will not find yourself needing life insurance, including when you need to fund final expenses and/or medical bills.

Unfortunately, when you discuss life insurance, a myriad of opinions can come into play. We’ll explore the types of options available to you and which may be best based on your unique situation.

What is term insurance?

There are two major forms of life insurance: term life insurance and whole/universal life insurance. The primary difference between term and whole life insurance is the number of years that each covers.

How does term life insurance work?

Term policies are issued for a given period, such as 10, 20 or 30 years. If you die during the term, your designated beneficiaries will receive the death benefit. If you don’t die during the term, the policy will expire when the term ends, and no benefits will be paid.

Term insurance is sometimes referred to as “pure” life insurance because its sole purpose is to provide financial protection for your dependents in the event of your death. Unlike whole/universal life insurance, a term policy has no value other than the death benefit.

One of the biggest benefits of term life insurance is that premiums remain the same throughout the term of the policy, which provides cost certainty. Also, term insurance is usually less expensive than whole/universal life — often much less expensive. The biggest drawback is that if you don’t die during the term of the policy, neither you nor your beneficiaries will receive any benefit.

It’s usually smart to choose a term that will cover the years while you’re working and your beneficiaries will need income if you pass away. For example, if you’re 35 years old, you may want to buy term life insurance with a 30-year term to provide income for your spouse while children are still in the house and until your spouse qualifies for Social Security. Keep in mind that the longer the term, the more expensive the policy usually is.

What is whole life insurance?

Whole and universal life insurance differ from term insurance in that they last for your whole life. With this extended period, premiums are more expensive than term life.

The major benefit whole/universal life insurance offers is that the premiums have the capability to grow over time as cash value throughout the life of the policy. This growth is generally tax deferred and can be accessed over the life of the policy, with some exceptions. However, if you do not touch this cash prior to passing away, it is disbursed to your beneficiaries in addition to the face value of the policy.

Excess whole life premiums are not invested in the stock market — rather, they are invested at the insurance company’s discretion. This does mean that you will likely be hampered related to the return you will enjoy through a whole life policy, but you also get the benefit of having level terms for your life, assuming you hold the policy until passing. 

In terms of purchasing whole life insurance, most people may be better served by purchasing it at a younger age to secure lower premiums. The premiums will still be higher than with term insurance, but you’ll be able to lock in a lower premium rate. Those who do wait to purchase whole life insurance at a much older age are doing so to solidify the “burial coverage” that whole life insurance is sometimes referred to as.

How is universal life different from whole life?

Universal life insurance, much like whole life, is coverage that is considered permanent in nature. You can also build up cash value in a universal life policy like you can in a whole life policy. The similarities between the two stop there.

The biggest difference between whole life and universal life is how the premiums are handled and how the excess is managed. With universal life, you can make premium payments at any time you wish and in any amount you wish — thus pointing to the flexibility it offers. This is why some refer to universal policies as adjustable life insurance. The important point to remember is that if you stop making premium payments or withdraw built-up cash value, this can impact your coverage amount, leading up to needing to put more cash in or even surrendering the policy.

Assuming you make excess premium payments, which is how these products are sold, your payments go into some sort of investment product. Those investments can be anything from stocks to bonds to mutual funds/annuities, but they’re restricted by what the insurance company offers.

Options vary widely among life insurance companies based on their investment philosophies and what they want to make available to their policyholders, which makes it critical to find a company and policy that aligns with your investing preferences. If you can find such a match, an investment-oriented universal life policy provides the potential for a better return than what you’ll see in a whole life policy. Just remember that it also presents greater risk. The other major difference with universal policies is that they offer more transparency about fees. 

Who should buy permanent life insurance?

Whole and universal life insurance has earned a bad reputation over the years as many life insurance agents and companies sell these policies as something they shouldn’t be — an investment. Some of that criticism is well deserved, and some of it isn’t.

The question is: What does your personal situation call for?

Insurance companies base premium amounts on actuarial tables that are weighted by age and health issues. Obviously, the older a person is, the more likely they are to die, which can cause the cost of life insurance to be high.

If you’re older and approaching retirement or are in retirement, then purchasing permanent life insurance may not be the wisest use of your funds. This is especially the case if you’re able to self-insure through other investments and have a way to provide for your family members upon passing and cover your financial responsibilities at death. If that is not the case, then purchasing permanent life insurance is something that could be considered, in addition to looking at viable alternatives such as long-term care insurance.

If you want permanent life coverage, an alternative to consider is to purchase coverage when you are young. While you can still get lower premiums under the term alternative, the term will eventually expire. Similar coverage under a whole life plan will cost more, but it also guarantees the death benefit for your entire life. Again, choosing among different types of life insurance all goes back to your personal situation and what fits best. 

Why life insurance is a bad investment

Having adequate life insurance coverage can be an essential part of retirement planning, but it should by no means be viewed as an investment. Life insurance was never meant to be an investment, but something to provide for final needs and for your family members once you pass away.

Beyond the misuse of the whole/universal life product, the other major problem behind using permanent life insurance as an investment is that you have no control over how the funds are invested. While you might find a company that shares your general investment philosophies, you still have little to no control over how excess premiums are allocated and invested. Accessing cash value comes with a cost: the lowering of the face value (or death benefit) of the policy.

Accessing cash from a universal life policy could cause the cash value to go lower than the associated costs and thus harm the policy. Also, any loans taken out against these policies incur interest that must be paid back. If you’re young, that might not be a problem, but many in retirement aren’t seeking to pay back loans on things such as life insurance.

Buying life insurance is a personal decision. Don’t allow sales materials to convince you that one type is better than another — instead consider your needs and those of your family.