All life insurance policies can help you accomplish the same basic goal: taking care of loved ones when you pass away. Whether you want to cover end-of-life expenses, pay off debts, replace your income, or leave someone an inheritance, life insurance helps ensure your needs are met. However, not all policies work the same way. The three main types of life insurance — term, whole, and universal — have varying costs and benefits. Here's a closer look at each policy type and its pros and cons.

Term life insurance

Term life offers coverage for a set amount of time, typically 10 to 30 years. Insurers generally require you to pay a fixed monthly premium throughout the term and offer you a fixed death benefit in return. If you happen to pass away during the term, your chosen beneficiary will receive a lump sum payment. If you don't, your coverage will expire without any payout.

There are also a few variations of term life coverage. For example, insurers may allow you to have your premium and death benefit increase or decrease throughout your term. That option can be helpful if you foresee your financial situation, and coverage needs shifting during the coverage period. Further, some insurers allow you to renew or convert your policy without requiring you to prove insurability, which can be especially beneficial if your health declines. When available, you can continue or upgrade your coverage without undergoing a medical exam that could increase your costs, although age limits may apply.

Term life insurance can be appealing because it tends to be more straightforward and affordable than the other options. It can also provide you with peace of mind during the coverage period. However, they do expire and there's no cash value component.

Pros and cons

Pros

• Affordable: The premiums are generally more affordable than those on whole or universal life policies.
• Simplicity: The policy is straightforward and easy to understand.
• Policy end options: You may be able to renew your policy or convert it into a permanent policy without undergoing a medical exam.

Cons

• Temporary coverage: Coverage is only designed to last for a set period so your beneficiary isn't guaranteed a death benefit.
• No cash value component: There's no cash value component so you won't have a cash fund to withdraw from or borrow against.
• Costs increase with age: Costs are based on many factors, including your health and age, so purchasing coverage will get more expensive as you age and if you develop health issues.

Whole life insurance

Whole life insurance may be a better fit if you're looking for a more permanent solution. When you sign up, you'll select a fixed death benefit and be assigned a fixed premium, both of which stay the same throughout your policy. As long as you pay your premiums, you can usually keep the coverage in place for the rest of your life. The policies do have an age-based maturity date, but it's typically set beyond the age most people live, such as 100 to 120 years old.

Whole life policies also come with a cash value component, which is like a savings account. As you pay your premiums, a portion of each payment gets added to the cash value account which accrues interest. Some life insurance companies even offer “participating” whole life policies which pay annual dividends. When dividends are paid, you can often receive them as cash, checks, or premium reductions.

In time, you'll gain the option to withdraw from the cash value account or borrow against it. You may want to do so, for example, to pay for your kid's college tuition or supplement your retirement income. However, any withdrawals or outstanding loan balances you don't repay before you pass away will be deducted from the death benefit your beneficiary receives. Further, if you outlive your policy, your insurer will send you the amount that's in your cash value account.

Whole life insurance can be appealing because it comes with a guaranteed benefit. As long as you keep paying your premiums, your chosen beneficiary will likely receive a death benefit when you pass away. The cash value component also provides a financial resource you can tap into during your life. Further, the dividends can help to reduce the cost of coverage. On the other hand, whole life premiums are relatively expensive.

Pros and cons

Pros

• Guaranteed benefit: Policies are designed to cover you for life or as long as you pay your premiums.
• Cash value: The policy includes a cash value component you can tap into throughout your life. The amount in the account may also be given to you if you surrender the policy early.
• Predictability: The premium payment and death benefit stay the same throughout the policy.

Cons

• More expensive: The premiums tend to be more expensive than term and universal life premiums.
• Not flexible: You can't adjust your premium if you want to pay more or less for a period.
• Complex: Whole life policies are more complex than term policies, involving both life insurance and a cash value component.

Universal life insurance

Universal life insurance is a more flexible type of permanent policy that offers coverage until a maturity date — usually when you turn 95 or 100 years old. If you pass away before the maturity date, a death benefit is paid to your chosen beneficiary. If you don't, you'll receive the amount in your cash-value account.

Additionally, universal policies allow you to adjust your premium payment up and down throughout your policy, within certain limits. For example, if you're going through a financial hardship and want to pay less, you can reduce your premium and the difference will be pulled from your cash value account. When your situation improves, you can increase the premium and replenish your cash value account. The only catch is, your policy could lapse if you reduce your premiums and your cash value reaches zero.

Some insurers also allow you to adjust your policy's death benefit. This can be helpful if you decide you want more or less coverage as you age. For example, you may decide you want to leave a larger inheritance behind to a family member or want to reduce the benefit to make your coverage more affordable.

A universal life insurance policy can be a good option if you want the key benefits of permanent insurance — a guaranteed payout and cash value component — along with more flexible monthly payments. In some cases, insurers even let you adjust your death benefit over time. However, universal life insurance is more complex and expensive than a term life policy. The investment portion of the account can also be reduced by low interest rates, commissions, and fees.

Pros and cons

Pros

• Flexible payments: You can adjust your premiums up and down throughout the policy.
• Adjustable death benefit: Your insurer may allow you to increase or decrease your death benefit.
• Cash value: The policy includes a cash value component you can tap into throughout your life. The amount in the account will also be given to you if you outlive the policy.

Cons

• Policy lapse risk: If your cash value hits zero and your premiums are too low to cover the cost of your insurance, your policy can lapse.
• Complexity: The policies are more complex and difficult to fully understand.
• Investment risk: Universal life policies don't come with a guaranteed return rate like whole life policies, although many limit losses by implementing a minimum rate.
• Higher premiums: Universal life insurance premiums are generally more expensive than those on term policies.

Comparing term, whole, and universal life insurance

Now that you know the basics of term, whole, and universal life policies, here's a look at how they compare side by side.

How to choose the right type for you

The best type of life insurance policy for you will depend on factors like your intentions for the death benefit, current financial situation, coverage needs, and risk tolerance. Read on for examples of when each policy type can make sense.

Term life insurance

Term life insurance is often best if you want affordable coverage and are okay if it's only for a certain period. For example, suppose you're married with two children and are two years into a 30-year mortgage. To ensure your family would have the means to pay off your home and continue their lifestyle in a worst-case scenario, you could opt for a 30-year term life insurance policy. By the time the policy expires, your coverage needs might change as your home would be paid off and your kids would be well into adulthood.

Whole life insurance

Whole life insurance is probably better if you have a bit more room in your budget and want to ensure that your chosen beneficiary will receive a death benefit. For example, suppose you've reached a point where you're financially comfortable and have a sizable amount of discretionary income each month. You decide you want to set up a life insurance policy to leave an inheritance behind to your children. A whole life insurance policy could suit your needs with its fixed, predictable premiums and a guaranteed fixed death benefit.

Universal life insurance

Universal life insurance can be a good fit if you want permanent coverage but also like the idea of having more flexibility with your premium and death benefit. For example, suppose you'd like to leave money behind for your children but worry about being able to afford the premium if you ever hit a rough spot. A universal life policy allows you to reduce your premium payment amount up and down as necessary.

Finding the right life insurance policy for you

Term, whole, and universal life insurance policies each have their pros and cons. Term life is often the way to go if affordability and coverage for a specific period are your top priorities. Whole life is better for those who want guaranteed, predictable coverage and have a larger budget. Universal life offers benefits similar to whole but with more flexibility.

If you're still not sure which is right for you, consider asking yourself the following questions:

• What financial responsibilities would be left behind if you were to pass away today (e.g. mortgage, debts, end-of-life expenses, children's college tuition)?
• Do people depend on your income (e.g. children, spouse, parents)? If so, how long would you want to cover their living expenses if you were to pass away?
• Do you want to leave behind a financial gift to someone? If so, who and how much?
• What is the total amount of coverage you would need? You can also run the numbers with InsureMe's life insurance calculator.
• Do you need coverage for a certain period or for life?
• What is the maximum amount you can and want to pay for life insurance coverage per month?
• Would you prefer it if you could adjust your premiums throughout your policy?
• Would you like a cash value component you could withdraw from or borrow against during your lifetime?

Want personalized help? InsureMe life insurance Advisors are standing by ready to answer your questions and help you find the best fit for your unique situation.