Term Life Insurance is insurance that pays the 'sum insured' in the event of the death of the 'life insured' to a designated beneficiary, if the death occurs during the Term of the insurance contract. In other words, you are only insured during the life of the contract. Typically, these Terms can be found for 1 Year, 5 years, 10 years, 20 years. Alternatively, depending on the jurisdiction, you may find terms that last until a certain age (e.g. Term 80, 85, 100). The longer the term, the higher the premiums.
Term insurance doesn't have any cash values (though some hybrids may include a rider that includes some additional benefits).
You cannot 'Cash in' a traditional term insurance policy. Should you outlive the Term (i.e. the insurance expires), you will lose all your premiums.
Some of the more interesting riders include: Guaranteed Renewable, and Convertibility. Renewability usually means that you won't have to pass a medical to be insured, though the premiums may be way higher. Convertibility means that you have the option to convert your policy to a different form of insurance (e.g. whole life). This may be an advantage if you initially were focused on low premiums, and then decided that you preferred accumulated cash values and an extended term. This may happen when you discover, later on, that you have a medical condition that would either raise your rates or render you uninsurable.
The advantages include: Low premiums, simplicity, convertibility.
Disadvantages: expiry of term (uninsured past a certain date), late premiums are not tolerated and leads to loss of insurance.
Insurance with cash values come in many forms.
Usually, Whole Life calculates cash values based on prevailing interest rates (very low right now). Whole Life has many riders including: Child rider, Disability (i.e. insurer pays your premiums while you're disabled), Accidental Death & Dismemberment, Dividend Participation Rider, Paid-Up insurance, Term rider (e.g. 100K whole life plus an additional $50 000 Term 20 years -- popular for those buying a home). You can rarely touch the entire cash value amount, but you could borrow against the cash value either directly -- through the insurer -- or through a third party like a bank. If borrowing from a bank, they will usually want the policy to be assigned to them and/or have the policy assign them as the beneficiary.
Universal Life is a modern Hybrid insurance model. It contains two components: Insurance Policy and Cash Values. The insurance portion is usually a Term Life policy. T100 or Term to 100 years old is a very popular choice. For the Cash Value portion, you could chose a mixture of Interest, dividends, and index instruments. Index instruments reflect a chosen Stock Market Index (e.g. S&P 500, Dow Jones 30, World Index). With these various investment options, it is possible to increase your rate of return and potentially accumulate high cash values.
For a Universal Life (UL) Policy, your premium has two components: the basic premium plus the optional contribution. The basic premium covers the insurance component. The Total Premium can never be lower than the cost of insurance. The optional contribution is the amount that you may decide to contribute over and above your basic premium. This will constitute your future cash values. Many jurisdictions have an Upper Limit on how much you may contribute in excess of your basic premium. The reason is that Payouts, upon death of the insured, are usually tax-free, therefore there is a huge incentive to pad your cash values for estate-planning and tax-free ccompounding reasons.
As for Advantages, for the above-mentioned reasons, UL is very compelling. You can: accumulate high cash-values, grow cash values with stock-market like returns, grow tax-free, etc. Also, many of the riders, but not all, of whole life policies may be available to you. You may also have many Terms in one UL policy, at the same time (T100 for estate planning, T20 for mortgage or business-life purposes). The premiums would lessen once the shorter term expired. Like Whole Life, you may be able to borrow against your cash values
Also, UL is flexible: Once you have accumulated some cash value, you may instruct your insurer to deduct any late premiums from your cash values. This is useful when cash is tight, and the business cycle is hurting your business. Furthermore, you may accumulate enough cash values, after a certain number of years, to self-finance your premiums. For example: if you put substantial amounts in cash values, you could stop paying premiums in 20 years or so.
Disadvantages: Less riders than Whole Life. Similar disadvantages as Term insurance depending on Term chosen for your policy. May face substantial tax penalties if you cash in some of your cash values. Cash values can decline when using indexed funds for cash values.
Note: Cash surrender values are not the same as Cash Values. Cash Values are the amounts, in addition to the Covered Amount, that will paid out to your beneficiaries in the event of your death. Cash Surrender Values are amounts that the insurer will pay you if you Cash In (stop the insurance) your policy. Cash surrender values are usually lower and increase with age.
Finally, consult your accountant. The biggest saving that you may enjoy is that of paying your premiums through your company, and having the beneficiary be a member of your family. This is a way of avoiding taxes. If you take money out of your company to pay your premiums, you will pay taxes on that money, and put the net amount towards your premiums. However, if your company owns the policy, you could pay the premiums directly from your company's cash, and then your estate or beneficiary will eventually receive the money tax-free. Combined with high 'Optional Contributions', this can be a way of reducing taxes and/or getting money out of your company tax-free. The rules and procedures of this strategy vary from jurisdiction to jursidiction; do ask a competent insurance agent or accountant how to proceed with your insurance premiums.
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