Skip to main content

Ready for Life Insurance? Understand Your Options

What we'll cover

  • Pros and cons of different life insurance options

  • The policies with a cash-value component

  •  A chart to quickly compare policy types

You’ve already made the wise choice to learn more about life insurance, but when it comes time to find the right kind of policy for your family, the jargon can get overwhelming. From term to whole to variable to universal and beyond, there’s a lot of terminology to wade through before you even begin to think about selecting one.

Understanding the choices you have, their advantages and drawbacks is an important next step in finding the right plan for you and your family.

What Is Term Life Insurance?

Term life insurance is the simplest (and generally most affordable) type of life insurance policy. Term refers to the set period of time it’s in place — often between 10 and 30 years. You pay the same premium on a monthly basis, and if you die within that term, your beneficiaries can file a claim to receive a predetermined payout.

Pros and Cons of Term Life Insurance

One strong benefit of term life insurance is that it’s less expensive than permanent life insurance. And, in the best case scenario, you never need to take advantage of the safety net that it provides. However, bear in mind that term life insurance has no cash value component. The policy ends when your term does, and if you become uninsurable during that time, you could have difficulty finding another term policy that you qualify for and can afford.

What Is Whole Life Insurance?

As the name implies, a whole life insurance policy is in effect for your whole life, rather than a specific term. For that reason it’s the most popular type of permanent life insurance (sometimes called cash-value life insurance).

Whole life insurance also includes a separate investment component that you can borrow against or cash out, with significant caveats. In exchange for premiums, whole life insurance pays out in two components:

  • Death Benefit: A predetermined sum of money your beneficiaries will receive when you die.

  • Cash Value: The amount that has accumulated based on the percentage of your premiums that has been invested.

With a whole life insurance policy there are options to access your policy’s cash value early, but keep in mind that each comes with consequences and penalties.

Pros and Cons of Whole Life Insurance

The clear upside of whole life insurance is its longevity. While term life insurance only lasts for a set period of time, whole life insurance lasts the duration of your life. The cash value that comes with whole life insurance is an added benefit as well.

But it’s important that you weigh that with the additional costs, which can easily be 10 times more expensive than term life insurance. And although it does offer an investment opportunity, you aren’t likely to see large investment returns compared to other investments, such as a typical 401K or individual retirement account, which makes whole life insurance a poor investment vehicle compared to other options.

What Is Variable Life Insurance?

Variable life insurance is another type of permanent life insurance with a cash value-account that is invested in various sub-accounts. These series of investment choices act similarly to mutual funds but are only available within a variable life insurance policy.

Pros and Cons of Variable Life Insurance

Like whole life insurance, variable life insurance is more expensive than term insurance. The cash value can grow or decrease based on the performance of the underlying securities in the policy. Because variable policies are a lot more volatile, you should only consider one if you can tolerate the associated risk.

However, it does offer some flexibility. You can pay a smaller or lesser amount of the premium based on the cash value. For example, if your premium is $500 per month and your cash value has reached the required amount, you can choose to pay only $250 and use the cash value to pay the remainder.

Variable life insurance policies can have significant tax advantages, such as tax-deferred accumulation of earnings. You can also access the cash value with a tax-free loan, but unpaid loans reduce the death benefit.

Universal Life Insurance

Like variable life insurance, universal life insurance has a cash-value component. While the investment option in a variable policy works like a mutual fund, the cash value associated with a universal policy grows based on the current interest rate set by the insurer.

Pros and Cons of Universal Life Insurance

Universal life insurance shares many of the same advantages and drawbacks of variable life insurance. The main difference between these two types of life insurance lies in how the cash value is invested and grows. A variable life insurance policy guarantees a cash value, while a universal policy does not.

Insurance Policy Options at a Glance

Use our comparison chart to weigh the pros and cons of each type of policy.

Insurance Policy Options at a Glance
Policy Component Term Whole Universal Variable
Coverage period A set time period, usually between 10 and 30 years Entire life of the insured Entire life of the insured Entire life of the insured
Cash value component No Yes Yes Yes
Premium Can vary Usually fixed Can vary Can very
Death benefit Yes, usually Yes, usually Yes, usually Yes, usually

Choose the Life Insurance Policy That Aligns With Your Goals

Most financial experts will agree that a term life insurance policy is the simplest and most effective way to protect your family, as opposed to more complex and expensive permanent options. But it’s important to understand the ins and outs of each option. Use your family’s specific needs and personal financial goals as your guide to find the right fit.

Ally has teamed up with Ladder to offer an innovative approach to term life insurance with an easy online application process and a variety of coverage options to fit a wide range of needs.

Disclosures: Ladder Insurance Services, LLC (CA license # OK22568; AR license # 3000140372) distributes term life insurance products issued by multiple insurers – for further details see . All insurance products are governed by the terms set forth in the applicable insurance policy. Each insurer has financial responsibility for its own products.

Explore more

Estate Planning Save Family

Read next

Inspiring stories, the latest financial discussions and helpful information to build your best possible future.