Types of life insurance: term, whole, universal, and variable
Key takeaways
04 · ideas- Term provides pure death benefit coverage for a set period
- Whole life includes a savings component with level premiums for life
- Universal life offers flexible premiums and adjustable death benefit
- Variable life allows cash value to be invested in sub-accounts
Basic level
The essentials · 1 min
Life insurance falls into two main categories: term and permanent.
Term life:- Death benefit for a specific period (10, 20, 30 years)
- No cash value component — pure insurance
- Fixed premiums for the term
- Least expensive per dollar of death benefit
- Lifelong coverage
- Cash value that grows at a guaranteed rate
- Fixed level premiums
- Most expensive form
Intermediate level
How it applies · 3 min
Universal Life (UL) and variants
Universal Life: Flexible premiums within limits, adjustable death benefit, cash value earns interest tied to the insurer's portfolio.
Guaranteed Universal Life (GUL): Minimal cash value but guaranteed death benefit to a specified age. Lower cost than traditional whole life.
Indexed Universal Life (IUL): Cash value growth linked to a stock index (e.g., S&P 500) with a floor (typically 0-2%) and a cap (typically 8-12%).
Variable Life and VUL
Variable products allow cash value to be invested in sub-accounts similar to mutual funds. The policyholder bears investment risk.
Variable products are classified as securities and must be sold by licensed securities representatives. Surrender charges often apply for 10-15 years after purchase.
Key comparison
| Product | Cash value | Premium |
|---|---|---|
| Term | None | Lowest |
| Whole life | Guaranteed growth | Highest |
| UL/GUL | Interest-linked | Moderate |
| IUL | Index-linked (floored) | Moderate-high |
| VUL | Market-linked | Moderate-high |
Advanced level
The math, step by step · 1 min
Tax treatment
Life insurance cash value grows tax-deferred, and death benefits are received income-tax-free under IRC Section 101(a). These tax features are relevant when comparing to taxable investment alternatives but not when comparing to tax-advantaged accounts like Roth IRAs.
For policies classified as Modified Endowment Contracts (MECs) — those funded too quickly relative to IRS guidelines — distributions may be taxed differently than standard policies.