Summary

The website content provides a concise overview of the four main types of life insurance, emphasizing their suitability for different financial situations and preferences, particularly in the context of preparing for the CFP exam.

Abstract

The article "Which Type of Life Insurance Should You Choose?" offers guidance for individuals studying for the Certified Financial Planner (CFP) exam by summarizing the key characteristics of term life, whole life, universal life, and variable universal life insurance. It advises that term life insurance is the most affordable option, suitable for clients with lower incomes, while permanent protection is a feature of whole, universal, and variable universal life insurance. The text underscores the importance of understanding the nuances between these insurance types, such as the risk and flexibility associated with policies that include the term "variable." It also stresses the necessity for exam candidates to set aside personal biases when answering questions, ensuring that recommendations align with the client's financial situation and risk tolerance rather than the planner's preferences.

Opinions

The author expresses a personal preference for term life insurance, considering it the best choice in most scenarios.
There is an emphasis on the need to detach from personal biases and preferences when advising clients or taking the CFP exam.
The term "variable" in life insurance policies is associated with higher risk and flexibility, which may not be suitable for extremely risk-averse clients.
The author suggests that variable universal life insurance could be attractive to "sophisticated investors" due to its separate investment account feature, which is not offered by whole and universal life insurance policies.
The article is presented as informational rather than educational, intended for review rather than initial study, and cautions readers that it does not replace professional financial advice.

Which Type of Life Insurance Should You Choose?

Tips for CFP exam

There are four types of life insurance that can be confusing on the CFP exam (or real life):

Term life insurance
Whole life insurance
Universal life insurance
Variable Universal life insurance

Note: The following sections summarize common types of life insurance and their applications in a very compact manner. The information provided here is not intended for education or study purpose. Please only use this form during the final review period.

Term life insurance

Implied by its name, “term life insurance” only lasts for a pre-specified number of years. On the other hand, whole, Universal, and Variable universal life insurance are relatively “permanent,” meaning that they either last until death or at very old age (95-year old, for example.)

I will not explain each type in detail here since the purpose is to help you work through the exam questions instead of studying the concepts for the first time.

If the client has a relatively low income, which one should they choose? Answer: Term life insurance. The main benefit of term life insurance is relatively cheap and affordable, especially if purchased at a young age.
If the client wants permeant protection, rule out term life insurance then.

A general rule for the CFP (or any) exam

When checking your belongings prior to entering the exam room, please also check your bias and preferences.

What do I mean by this? For example, I am a firm believer in term life insurance. I want to recommend term life 99% of the time if possible (the rest 1% does not really need life insurance.)

Does that mean I can only pick out term life insurance on the test? Not if I want to fail!

Learning to keep our preferences, bias, and even experiences at a healthy distance is essential when working with (for) others.

Whole, universal, and variable universal life insurance

“Variable” is a term that shows up in multiple types of life insurances. For example, whole life policies include variable life and ordinary life policies. The similarity in names can complicate initial information processing but can also offer insights later on.

“Variable” signals fluctuations and risks. If the case mentions that a client is extremely risk-averse, then we can probably rule out anything that contains the word “variable.”

“Variable” can also imply flexibility. If the client is a gig worker and their income goes up and down over time, the client might prefer flexible (instead of level) premium payments, which rule out whole life policies. Variable universal could be a good candidate in this scenario.

Besides offering flexible premium payments, variable universal policies also include a feature that can be attractive to “sophisticated investors” that is a separate investment account. Whole and universal life insurance do not allow separate investment accounts. So if a client prefers a high rate of returns and has a relatively high-risk tolerance, a separate account allowing various investment choices might be very attractive.

This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any significant financial decisions.