Life Insurance: Not Your Father’s Investment

Many people think that when it comes to life insurance, they have only two choices: term or whole life. That’s not entirely true — today’s whole life insurance is a lot more flexible than your father’s life insurance policy. Read on to find out more about the different types of whole life insurance, and how they can enhance your investment portfolio.

Whole life, universal life and variable life are all cash value policies. They combine life insurance coverage with a long-term savings and investment product.

Whole Life

Whole life is the traditional cash value life insurance product. As long as you pay your premiums, it will provide a guaranteed death benefit (the face value) to your beneficiary when you die, no matter how long you live.

When you buy a whole life policy, your premiums remain the same for your entire life, no matter your health status. You can select a policy that’s “paid up” at a specific age, such as 65 or 85, or one that’s paid up after a specific number of payments, such as 10 or 20. You can even buy a single-premium policy, which, as the name implies, requires only one payment.

Over time, whole life policies also accumulate cash value. This differs from the face value, or death benefit. State insurance laws determine the minimum cash value an insurance policy must return; the rate is guaranteed. In most cases, the cash value grows tax-deferred.

A policy’s cash value gives you a savings fund you can tap after a specified number of years. You can take out a loan against your policy’s cash value or, if you no longer need the coverage, you can surrender the policy for the entire cash value.

Variable Life Insurance

Like traditional whole life, variable life insurance< provides a death benefit and builds cash value. However, you can invest your premiums in stocks, bonds and mutual funds that offer different degrees of risk and reward. With a whole life policy, your death benefit and cash value is guaranteed, but with a variable life policy, they vary with the performance of your investments.

Universal Life Insurance

Universal life insurance also provides a death benefit and builds cash value, usually at a money market rate. Once the cash value reaches a certain specified amount, you can alter your premium payments. If cash is tight, you can make lower payments, as long as you don’t use up the accumulated savings. And if you qualify, you may be able to increase your death benefit.

However, with a universal life policy, you must be careful to make sure to pay enough premium to maintain coverage, otherwise the policy will lapse. Your cash value account can disappear faster than you might expect if interest rates fall below projections, or the insurer’s cost of coverage or administrative expenses rise. You can buy a policy with a “secondary guarantee,” otherwise known as a “no-lapse guarantee,” that will maintain your coverage even if these events occur.

Variable Universal Life Insurance

Variable universal life insurance combines features of both variable and universal life policies. As in variable life, you can allocate premiums to a variety of investment options. And as in universal life, your premiums are flexible, within certain minimums and maximums, and as long as your health permits, you can usually increase or decrease your death benefit amount.