Explore the different types of life insurance
There are essentially five different kinds of life insurance: term, whole life, universal life, indexed universal life, and variable universal life. Each is structured differently and appeals to different clients.
Term life insurance
Think renting, not buying. Term insurance is just that — insurance for a term, or a specific number of years. It’s not permanent insurance that provides lifetime coverage for your clients, but it typically meets a temporary need, like protecting the family until the kids are out of school or the mortgage is paid off.
- Generally low initial cost, but becomes less affordable at older ages
- Does not build cash value
- Specified premiums must be paid when due or the policy terminates
- Can be level (same premium each year from 1-20 years) or annual renewable (coverage can be renewed, with generally higher premiums, each year)
- If needs increase in the future, a new policy must be purchased
Permanent life insurance
Many of your clients might think of life insurance as simply term insurance — a temporary way to protect their family from financial hardship. While term is an important type of life insurance, it’s not the only one. Permanent life insurance, which is designed for long-term goals, can also be a smart addition to many financial plans for clients who want more ways to protect their family, reduce taxes, and grow their money over time.
Permanent life insurance — such as whole life, universal, indexed universal, and variable universal — can help your clients:
- Live more. Unlike term insurance, permanent life insurance protects your clients’ family for their entire life, while adapting throughout their life to provide access to cash when they need it.
- Keep more. Permanent life insurance helps your clients keep more of their money. There are generally no contribution limits, and no income taxes on money they pass along.
- Build more. Unlike term insurance, your clients’ cash value can grow over time. And like their 401(k)s or IRAs, permanent life insurance can build their assets more quickly over time with true tax-deferred growth and offers potentially tax-free distributions.
Whole life insurance
Traditional whole life insurance can be used for clients who have a long-term insurance need and want cash value.
- Guaranteed fixed premiums for as long as the policy stays in force. Premiums must be paid when due or policy terminates, at least in early policy years
- Offers guaranteed minimum cash surrender value and non-guaranteed dividends
- Cash surrender value can be accessed by policy loans and surrender of dividends, generally income-tax-free if structured properly
- Will need to purchase additional policies if needs increase
Universal life insurance
Universal life insurance builds cash value by crediting interest at a rate set by the insurance company. Universal life also provides substantial flexibility in paying premiums, so your clients can vary timing and amount or payments within broad limits.
- Cash value potentially grows tax-deferred through current interest crediting rate
- Cash surrender value can be accessed by policy loans and withdrawals, generally income-tax-free if properly structured
- Premium payment flexibility
- Coverage flexibility so one policy can meet all needs over a lifetime — can increase coverage (with evidence of insurability) or decrease coverage if needs become less as children become adults
- Unlike whole life, policy is more transparent to client since they can see what the crediting rate is and actual policy charges in the Annual Report
Indexed universal life insurance
This type of insurance allows clients to participate in the market with the potential to build cash value through equity-linked options and full downside protection. Clients select the index they want to track (such as the S&P 500® Index) and their cash value potentially grows based on the performance of the index, subject to a floor (generally 0%) and a current growth cap.
- Cash value potentially grows tax-deferred based on the performance of index-linked interest options
- Cash surrender value can be accessed by policy loans and withdrawals, generally income tax-free if properly structured
- Premium payment flexibility
- Coverage flexibility
- More transparent than whole life
Variable universal life insurance
Variable universal life is a good fit for clients who are comfortable investing, have a suitable risk profile, and want the upside potential of the market but can withstand potential downside exposure. With this type of insurance, cash value potentially grows with the performance of the investment options selected by the client. This is the only type of life insurance where there is the potential to exceed the cash value generated by other types, but there is also the potential for loss, including possible loss of principal invested. It offers the most upside and downside of any of the types of insurance.
- Cash value potentially grows tax-deferred (but can also decline) with the performance of the investment options chosen
- Cash surrender value can be accessed by policy loans and withdrawals, generally income-tax-free
- Premium payment flexibility and face amount flexibility (need evidence of insurability to increase face amount)
- Many investment options to choose from — often 50 or more.
- More transparent than whole life
S&P®, Standard & Poor’s®, S&P 500® and Standard & Poor’s 500tm are trademarks of Standard & Poor’s and have been licensed for use by Equitable.
All guarantees are based on the claims-paying ability of the issuing life insurance company. Guarantees do not apply to the variable investment options in a variable universal life policy.
This webpage highlights some key features and benefits of the products. It should not be considered tax or legal advice. For more details on specific policies, including rates and policy charges, please obtain an illustration or term quote.
Variable universal life products are sold by prospectus; please have clients consider the charges, risks, expenses, and investment objectives of variable universal life products carefully.
Loans and partial withdrawals will decrease the death benefit and cash value of a life insurance policy and may be subject to policy limitations and income tax. In addition, loans and partial withdrawals may cause certain policy benefits or riders to become unavailable and may increase the chance a policy may lapse. If the policy lapses, is surrendered, or becomes an MEC, the loan balance at such time would generally be viewed as distributed and taxable under the general rules for distribution of policy cash values.
There are fees and charges associated with a variable universal life insurance contract that include mortality and expense risk charges, administrative fees, investment management fees, surrender charges, and charges for optional riders. Additionally, variable universal life policies and its riders have restrictions and limitations.
There are fees and charges associated with Indexed, Whole, and Universal Life Policies that include but are not limited to insurance changes, administration fees, surrender charges, and charges for optional riders.