Life

Whole life or permanent insurance pays a death benefit whenever you pass away — even if you live to 100! There are three major types of whole or permanent life insurance, traditional whole life, universal life and variable universal life, and there are variations within each type.

In the case of traditional whole life, both the death benefit and the premium are designed to stay the same (level) throughout the life of the policy. The cost per $1,000 of benefit increases as the insured person ages, and it gets quite high when the insured lives to 80 and beyond. The insurance company could charge a premium that increases each year, but that would make it very hard for most individuals to afford life insurance at advanced ages. Therefore, they keep the premium level by charging a premium that, in the early years, is higher than what’s needed to pay claims, investing that money, and then using it to supplement the level premium to help pay the cost of life insurance for older individuals.

By law, when these “overpayments” reach a certain amount, they must be available to the policy-owner as a cash value if he or she decides not to continue with the original plan. The cash value is an alternative, not an additional, benefit under the policy.

A permanent life policy provides lifelong insurance protection. The policy pays a death benefit if you die tomorrow or if you live to be a 100. There is also a savings element that will grow on a tax-deferred basis and may become substantial over time. Because of the savings element, premiums are generally higher for permanent than for term insurance. However, the premium in a permanent policy remains the same, while term can go up substantially every time you renew it.

In a permanent policy, the cash value is different from its face value amount. The face amount is the money that will be paid at death. Cash value is the amount of money available to you. There are a number of ways that you can use this cash savings. For instance, you can take a loan against it or you can surrender the policy before you pass away to collect the accumulated savings.

Traditional whole life insurance is the most common type of permanent insurance policy. It offers a death benefit along with a savings account. If you pick this type of life insurance policy, you are agreeing to pay a certain amount in premiums on a regular basis for a specific death benefit. The savings element would grow based on dividends the company pays to you.

Universal / adjustable life insurance is a type of policy offers you more flexibility than whole life insurance. You may be able to increase the death benefit during the life of the policy within limits, if you pass a medical examination. The savings vehicle, known as a cash value account, generally earns a money market rate of interest.

After money has accumulated in your account, you will also have the option of altering your premium payments — providing there is enough money in your account to cover the costs. This can be a useful feature if your economic circumstance has suddenly changed. However, you would need to keep in mind that if you stop or reduce your premiums and the saving accumulation gets used up, the policy might lapse and your life insurance coverage will end. You should check with your agent before deciding not to make premium payments for extended periods because you might not have enough cash value to pay the monthly charges to prevent a policy lapse.

Variable life insurance combines death protection with a savings account that you can invest in stocks, bonds and money market mutual funds. The value of your policy may grow more quickly, but you also have more risk at the same time. If your investments do not perform well, your cash value and death benefit may decrease. Some policies, however, guarantee that your death benefit will not fall below a minimum level.

When you purchase variable-universal life insurance, you fundamentally receive the features of variable and universal life policies. You have the investment risks and rewards characteristic of variable life insurance, coupled with the ability to adjust your premiums and death benefit that is characteristic of universal life insurance.