Types Of Cash Value Life Insurance
There are two main types of cash value life insurance: whole life and universal life. I have found that there is often some confusion, even among so-called experts, when it comes to permanent insurance (also called “cash value insurance”). I’ll do my best here to clear up the confusion and clearly explain the similarities and differences between the two.
Whole Life Insurance vs. Universal Life Insurance
cash value life insuranceSo what is the difference between the two. In “insurance speak”, a whole life insurance policy in its purest form is a fixed premium, level death benefit policy that accumulates guaranteed cash values and offers a guaranteed death benefit. In contrast, a universal life insurance policy is a flexible premium, flexible death benefit policy that may or may not accumulate cash values based on variables such as mortality expenses and what crediting rate the insurance company is paying on internal cash values. The differences between the two types of policies might not be evident at first glance, but these differences make a big difference in how the policy works and consequently how the policy might or might not be a good fit for your needs.
Whole life (WL) is what we have come to know as “traditional life insurance”. In a whole life policy, the policyholder chooses a death benefit, which will remain level for the duration of the policy. In exchange for this level death benefit, the policyholder will pay premiums that will also remain level for the duration of the policy. As time passes, a cash surrender value will accumulate in the policy which the policyholder has access to through withdrawals and/or policy loans. This cash surrender value is also guaranteed, and laid out ahead of time so that the policyholder knows in advance how much cash value will be available at any given point in the future. Whole life policies are designed so that if the insured is alive at the time the policy endows (often age 100) the cash value would exactly equal the death benefit. It’s important to note that everything in a traditional whole life policy is guaranteed, so there are no “moving parts”. In a future post, I will highlight some of the features available in certain whole life policies that make them somewhat more like the universal life insurance policies that I will describe next.
Universal Life Insurance
Universal life insurance (UL) is different from whole life in both structure and function. In a UL policy, the policyholder has the ability to alter both the death benefit and the premiums paid into the policy. With a UL policy, the policyholder pays premiums into the policy, and each month a “cost of insurance” (COI) charge is assessed against this premium. Anything left over is then credited with interest and remains to accumulate as cash value. Over time, if more premiums are paid into the policy than are charged for the COIs the cash values will continue to grow. If the COI charges exceed the premiums paid, eventually the cash values will be depleted and the policy will lapse. A UL policy offers some flexibility in that a policyholder can reduce the amount of the death benefit, which has the effect of lowering the COI charges. Also, a policyholder can alter (and even skip) a periodic premium payment as long as there is sufficient cash value to cover the COI charges for that period of time. In a universal life insurance policy, there are some guarantees. These guarantees take the form of limiting the maximum COI that can be charged and ensuring a minimum interest rate that must be credited to cash values. In a future post I will discuss some of the varieties of universal life and how they might affect your policy.
When you are ready to buy a life insurance policy, we are here to help. You can begin your application process online, right from the same page where you reviewed life insurance rates. You can also call Richard Eddy at (877) 883-3561. Richard is the founder of Rates4Term.com, a financial planner, and an experienced life insurance agent. He can answer your questions, help you to compare life insurance rates and help you through the application process.
We look forward to talking with you soon.
Founder of Rates4Term.com and Cona Financial Group Richard Eddy has been assisting clients with their life insurance needs since 2005. He is an expert helping people find the right policy to fit their specific situation. In addition to insurance planning, he is also experienced in a wide range of financial planning topics including investment and portfolio analysis, tax planning, retirement planning and estate preservation strategies. You can call Richard toll-free at (877) 883-3561.