Whole Life Insurance
A Whole Life insurance policy is a permanent policy which is guaranteed inforce as long as the premiums are paid, or until the policy endows (which usually happens when the insured person reaches age 100 or 120). Whole life policies are a great option for someone who wants to create an estate. Because Whole Life policies are permanent, the premiums will be higher than with a term policy, but unlike a term policy, the whole life policy will always pay out upon the insured’s death.
The premiums for a whole life policy are fixed and level – the policy owner chooses the premium schedule, and each premium is the same amount for the life of the policy. That means that the premium rate is higher on younger people, but as they age, their premium is lower in relation to their mortality risk. There are also several options for paying premiums, including single-premium (the policy is purchased with one large premium payment) and limited-payment (premiums are higher, but are only paid for a set amount of time, such as 20 years or to age 65). This flexibility in premium options is great for those who want the protection of a permanent policy, without worrying about paying premiums during their retirement years.
The death benefit is also fixed. A whole life policy will accumulate cash value, with a guaranteed interest rate, to assure the payment of the death benefit. When a policy endows, the cash value is equal to the death benefit. Because the policy has a cash value, the policy owner can borrow against the policy up to the amount of the cash value. If a policy owner chooses to surrender the policy, they will get back the cash value—minus fees—but will give up the guaranteed death benefit.
Universal Life Insurance
Universal Life (UL) insurance policies are also permanent policies, but provide more flexibility for policy owners. With a UL policy, owners have the ability to adjust premiums and death benefits to suit their needs (pending insurability). Premiums paid in to the policy accumulate as interest in the policy’s cash value, either at a guaranteed rate or the current rate, whichever is higher.
Policy owners have two options for the death benefit:
- Option A: The death benefit is level, and equals the policy’s face value. A $1,000,000 will pay $1,000,000 at death. Because of the level benefit, more of the premium goes directly to the cash value, which increase more quickly.
- Option B: The death benefit equals the face amount, plus the cash value. Cash value does not increase as quickly, because more of the premium is applied to cover the increasing death benefit.
Unlike a Whole Life policy, policy holders have the option to withdraw cash value without surrendering the policy, in addition to taking a policy loan. As long as the cash value can cover the monthly management fees, the policy will remain inforce. Withdrawals will decrease the death benefit, but they are income tax-free up to cost (the amount of premiums paid in).
Variable Life Insurance
Similar to UL policies, Variable life policies have a permanent death benefit, and accumulate cash value. Variable policies, however, are also a form of investment—premiums are used to purchase a mixture of stocks, bonds, and mutual funds, and the gains are tax-deferred until the death benefit is paid out. Because there is no guaranteed rate of return, a variable policy has the potential to increase in cash value more quickly.
If the policy is a Variable Universal Life policy, owners have two death benefit options:
- Option A: The death benefit remains level.
- Option B: The death benefit varies with the fluctuating cash values. It has the potential to increase, but it can also decrease if the market goes down.
If the policy is Variable Whole Life, however, it has a guaranteed minimum death benefit, which is equal to the policy’s face value. It can never dip below that amount, but it will not increase in cash value as quickly as a VUL policy might.
Permanent life insurance policies are a great way to protect your family, and create an estate, but there are many options and some can be complicated. An advisor can help you understand the pros and cons of each type of policy, and will help you choose what is best for you and your family.
