Term Life and Whole Life Insurance:
Basics for Online Shoppers

Purchasing low cost life insurance doesn't need to be a grueling experience. Our site will help you understand the most common terms to determine what is best for you. Then, while you're here, please feel free to use our online service to find your best life insurance rates and quotes!

General Life Insurance Terms

Term Life: "Cheap" term life insurance is often purchased because It is the least expensive of all types of policies and comes in some variations including modified, graded, and decreasing. Decreasing term is generally the cheapest of all because the face value decreases over time while your premium remains level. This is generally purchased as a conversion or as mortgage life insurance.

The most common term life policy is “level term” meaning your face value and premium will be unchanged for the initial period of the term. The policy may say something like “renewable to age 95,” but contrary to what folks sometimes are led to believe, that does not mean your premium will stay the same. Term life premiums increase substantially at the end of the initial term.

Term life comes with a variety of riders, but has no cash value, so you can’t borrow against it or cash surrender it. If you stop paying premium, you simply lose it.

It is possible to convert a term policy to anything else that the same company offers. If the company only offers term, your conversion will be to "annual renewable." For this reason you should purchase term from a company that also offers universal or whole life. When you convert, your premium will be adjusted to your age at that time. It may actually be less expensive to purchase a new policy from a different company, but if you have developed health problems, that may not be an option.

Level term life has its drawbacks, but is suitable for people who have reason to believe that they will not need life insurance as they get older. It could be used to insure a family business or to provide for education for children in the event of the death of the primary wage earner. It’s difficult to know for sure exactly what a person will need 20 or 30 years into the future, but a person who plans to pre-pay final expenses and who does not have an estate large enough to be effected by estate taxes probably will not need a large policy once the family has grown and the home mortgage has been paid. Remember, however, that life insurance also provides for a spouse, creates a legacy for loved ones, and simply makes things a lot easier for those who are left behind.

Permanent Life / Whole Life
A form of permanent life insurance will give you the most security for the longest time period—your whole life if set up properly. The easiest understood form of permanent life is Whole Life insurance. This simply provides you with a set face value and a set premium (called “level”) for your whole life, and if purchased while you are young, it can be quite low cost. It builds cash value, giving you a source of emergency funds as well as a surrender value if you decide later on that you no longer need it. The premiums are the more expensive than term, but far less than trying to renew a term or temporary policy after you have had one 20 years. As long as you don’t purchase a “modified” whole life, your premium will never change. A whole life policy also has riders available so you can cover your entire family or purchase disability options, unemployment waivers, and more.

Permanent Life  / Universal Life
Although it is more confusing to explain and can be unsatisfactory if not set up by a knowledgeable agent, Universal Life is the form of permanent life insurance with the most and best options. The premium goes into a savings account first, where it earns interest. Each month the cost of insurance and fees are deducted to pay for the universal life insurance policy which is in a separate account.  Because of this arrangement, the policy is flexible, meaning you can change your premium and your face value. Once you have some cash built up, you can also make withdrawals. If you never touch the savings portion, you can have enough in it after 20 years or so that the policy will begin to pay for itself, allowing you to reduce or eliminate your premium. The mistake that some people make which causes confusion about the universal life is in the initial funding. The policy will have a minimum premium which is just enough to pay the COI and fees for the first few years, sometimes as long as 15 years. Agents who are eager to gain clients by offering the “cheapest” premium, and who do not understand how a universal works, are apt to offer you a policy with a minimum or slightly higher premium. This may be a mistake as your savings account will not be able to build up and thus the policy will not be funded properly in later years.

If set up properly, the Universal Life is actually your most reasonably priced option with many companies. Then only two things could affect the future premiums. First the company could increase the costs of insurance to the highest allowable rates; no company would ever do this because they would lose many of their clients. Second, the interest rates paid on the savings portion could drop. This is not always in the company’s control, but even if rates go down, there will always be a floor below which they cannot go. Furthermore, each year, you receive a statement showing what your rate is and how your cash is building. A quick glance or a brief review by your agent will give you the assurance you need that your policy has remained stable and unchanged. If interest rates did drop, and you noticed that your cash was starting to decrease, a premium increase of just a few dollars would keep it growing.

Some other Types of Policies

No-Load
In today’s market place, nearly everything we use is purchased through a chain of individuals. In some places it is still possible to buy milk directly from the farmer, and you can go online and purchase your new car directly from the manufacturer—if you can find one. You will save dollars, but don’t expect the dealership to be real cooperative in backing up a warranty on a car they were not permitted to sell.

Insurance is similar. You can find “no-load” policies, meaning you do not deal with an agent. Generally such policies are purchased through the mail, and you are totally responsible for understanding the terms. Some companies may use agents, but you will be responsible for paying the agent directly, thus lowering your premium as the agent’s commission will not be factored into it. Be aware, however, that such policies may appear cheaper, but are usually not what you thought you were purchasing. No load is possible, but is not always the best way to purchase life insurance.

Joint Life
Only a few companies offer this variation, available either as whole life or term, but it is worth mentioning as it can save a significant amount of money and be an option when one person has pre-existing health conditions. Joint life insures two or more people on one policy and for one premium that is more than it would be for the youngest person, but less than it would be for the oldest. The policy can be set up as first to die or second (last) to die (also known as “survivor”) option. The “first to die” pays when the first person on the policy dies and provides a survivor with an income. The survivor or second to die option assumes that the money will not be needed until the last person on the policy dies. Then it provides heirs with a legacy. This variation provides a great tax free way to pay estate taxes.

Company Ratings
Company ratings are assumed to provide information about the financial stability of the company as well as facts about the claim paying history. Some of the best known sources are A.M. Best or Standard & Poor's.

Additionally, a newer source is Street.com. Ratings from this company are paid for by the citizens or people on the street. Regardless of ratings, however, it is also a good idea to talk to your friends and business colleagues, and to check the Better Business Bureau for complaints against a company you may be considering. This information will often be more reliable than a formal rating.