The primary purpose of insurance is to protect yourself against an expense you (or your beneficiaries) could not otherwise afford. The nuances between insurance, specifically life insurance policies, can be complex. This article explores the two main types of life insurance policies and breaks down the use cases for each option.
Life Insurance Types
There are two main types of life insurance policies: permanent and term. Permanent insurance provides coverage for the insured’s entire lifetime, while term insurance provides coverage for a specific period or “term.” Whole life insurance is one of the primary types of permanent coverage (various types of universal life insurance are also permanent life coverage) and is commonly marketed as a combination of life insurance and an investment vehicle for retirement savings, as a way of emphasizing asset protection and income tax-free growth.
On the other hand, term life insurance is a temporary coverage that pays a guaranteed amount if the policyholder dies during the period of coverage. Whole life insurance is relatively expensive and has stable but limited growth, and accessing the policy's investment portion (the cash value) can be costly. Professional advisors can help individuals assess which policy type fits their needs.
The following illustrates the two types of insurance policies further:
Whole Life Insurance
The policyholder is covered for their entire life; the policy builds a cash value that grows at a guaranteed rate.
- Pros:
- Permanent policy
- Level premiums
- Guaranteed cash value
- Potential asset protection
- Cons:
- Higher premiums & fees
- Complexity
- Limited growth
Term Life Insurance
This policy coverage lasts for a specified term or amount of time (commonly five, 10, or 20 years).
- Pros:
- Lower premiums
- Simplicity
- Flexibility
- Cons:
- Policy expires
- Not always fixed premiums
- No cash value
Cost Breakdown of Insurance Policies
Compare boxes of the same colors:
| $1,000,000 Death Benefit | $2,000,000 Death Benefit | ||
|---|---|---|---|
| Male | 40 years old | $16,500 | $33,000 |
| Female | 40 years old | $13,500 | $27,000 |
| $1,000,000 Death Benefit | $2,000,000 Death Benefit | ||
|---|---|---|---|
| Male | 40 years old | $850 | $1,700 |
| Female | 40 years old | $650 | $1,300 |
Market averages as of July 2025, rounded. 20-year term life, non-smoker. For illustrative purposes only, actual amounts vary by individual. Average data from Aflac1 and Ramsey Solutions2 .
Sales Commission in Relation to Insurance Policies
Agents may receive commissions on the sale of life insurance policies in the range of 30 to 125% of the first year of premiums paid and can have trailing commissions of about 3 to 10% per year of premiums paid. Because whole life premiums cost more than term policies annually, a potential conflict of interest could arise for insurance brokers to gravitate toward the higher premium policies.
The Cash Value
Premiums for whole life insurance are broken out into different buckets. Part of the premium is used to cover the cost of the insurance and administration fees; the other part of the premium is set aside in the cash value. The cash value is the investment portion of the policy. It grows tax-free and is assigned a guaranteed minimum growth rate. These guaranteed growth rates typically provide steady and reliable returns; however, they may yield lower net returns over time than other investment options.
Term life insurance policies do not accumulate a cash value. The premiums paid are strictly for the contractual guarantee of a death benefit if the policy owner dies during the term. This gives the policy owner greater flexibility over monthly cash flow to direct to other sources of savings outside of the life insurance contract, whether that be debt reduction, additional retirement savings, or another source.
Accessing Cash Value
There are three primary ways to access the cash value of a whole life policy.
- Withdrawal – You can typically take a nontaxable withdrawal of the principal (what you paid in) from a whole life policy. This means you can’t pull out more than you have put in without tax consequences. When you withdraw from the cash value, the death benefit may be reduced.
- Surrender – You can cash out your policy. This terminates the life coverage and sends the full cash value (minus surrender fees) to you. There may also be taxable income, which should be considered if the cash value is larger than your principal.
- Loan (most common) – You can borrow funds against the cash value of your policy. The loan will be assigned an interest rate. The loan does not have to be repaid, but outstanding loans reduce the death benefit at death (including interest). The interest on these loans is paid to the insurance company.
In comparison, term policies allow you to determine how accessible the funds are since you can choose the investment vehicle used (employer retirement plan, Roth IRA, Health Savings Account if eligible, taxable brokerage account, real estate, etc.). You can use a combination of different accounts to provide access to funds when needed, while being tax-efficient and saving for future goals.
Asset Protection From Lawsuits & Creditors
Whole life insurance can be an effective asset protection strategy in certain states. However, this application can be limited by state-specific laws, so it is important to understand your state’s regulations on asset protection. In addition, effective asset protection strategies outside of life insurance, such as account titling, umbrella and professional liability insurance, and trust creation, may be more effective depending on the situation.
The Bottom Line
Individual goals, financial circumstances, and long-term planning needs should be taken into account when choosing a life insurance policy. After all, it is a deeply personal decision. Given the complexity and variety of available options, most individuals can benefit from seeking guidance from qualified, independent professionals to help ensure the selected policy aligns with their unique situation.
For more information on wealth advisory services and insurance, please reach out to a professional at Forvis Mazars Private Client.
Forvis Mazars Private Client services may include investment advisory services provided by Forvis Mazars Wealth Advisors, LLC, an SEC-registered investment adviser, and/or accounting, tax, and related solutions provided by Forvis Mazars, LLP. The information contained herein should not be considered investment advice to you, nor an offer to buy or sell any securities or financial instruments. The services, or investment strategies mentioned herein, may not be available to, or suitable, for you. Consult a financial advisor or tax professional before implementing any investment, tax or other strategy mentioned herein. The information herein is believed to be accurate as of the time it is presented and it may become inaccurate or outdated with the passage of time. Past performance does not guarantee future performance. All investments may lose money.