A common question I get is what is the difference between term life insurance and whole life insurance.

In short, a whole life policy has a cash value and a term life has no current value. So if you need money, you can borrow against your whole life insurance policy. The court sees a whole life policy as an investment and generally allows you to keep a certain value of whole life insurance. Generally speaking, whole life premiums are higher and the death benefit lower than term life and are often sold as retirement investments.

Term life insurance is for a set period of time, ie 10 years and if the insured doesn’t die within the insured period, you don’t get anything for the money paid, nor can you borrow any money from the policy. Term life is essentially a bet by the insurance company that you won’t die within a certain period of time. Generally speaking, the premiums are lower and death benefits are higher than whole life policies. The bankruptcy court views term life policies as protection for your dependents and allows unlimited amounts.

Lastly, there is something called a universal life insurance. In my experience, universal life is basically another name for a whole life policy. The easiest way to find out is to ask the insurance company “can I borrow money from this policy”. If they say no and you have never borrowed money from the policy before, it is a term life policy and deductable as an expense in bankruptcy.