Whole life insurance, also known as “straight life” insurance or “ordinary life” insurance, is a life policy that is secured to stay in effect for the life of the insured, as long as required payments are made, or at the maturity date. If payments are missed, the policy may be forfeited and the death benefits paid to another beneficiary. If a beneficiary dies during the term of the policy, then the balance of the premium paid shall be paid directly to the surviving beneficiary. Whole life insurance policies are very expensive and are generally not recommended.
Variable universal life (VUL) and whole life insurance policies fall into the category of permanent life insurance policies. They are typically guaranteed renewable by a third party, such as a bank or other lender. These policies have a cash value, called the death benefit, which can vary as expected over time. The cash value of these policies is not affected if the death benefit falls short, allowing the policy to stay in effect even if current rates are lower than expected. In most cases, these policies pay out at a rate that is slightly less than the current premium market.
In contrast, permanent life insurance policies are purchased under a single contract. Typically, these contracts specify the death benefit and premiums that must be paid, as well as other terms. In most cases, these policies are more expensive than VUL and whole life policies. This is due primarily to the fact that the face value of the contract is larger. Additionally, when the contract matures, the premiums typically drop.
Permanent life premiums typically have one of three maturities, either fixed or flexible, payment schedules, as well as investment options. The contract typically has an option to convert the contract into a permanent policy, which allows for additional savings. However, once the original contract is converted, it is necessary to convert the contract again in order to maintain the same premium payments. This process can be particularly problematic, as increasing the premium beyond the option may result in surrendering the policy.
Both permanent and term insurance products offer flexibility in premium payment and age. For example, a healthy young person in their twenties with a high earnings potential may opt for a level premium, allowing them to purchase a level premium policy with a guaranteed return. However, a person that is older with declining health may opt for a lower level premium in their late thirties with a lower income, allowing them to make higher premium payments and save a larger cash value. These people may also decide to borrow money against the cash value of their policy, with interest earning above the cash value. Many people opt for level premiums due to the ability to increase the cash value and save a higher cash amount.
All life insurance policies are rated on a scale of “risk”. As an investor, your goal should be to find the highest rated life-long insurance policy that will allow you maximum returns while having the least investment risk. The insurance industry ranks policies based on the “investment risk” they entail. An investment risk is a percentage chance of your premium payments growing from the original face value of the policy. The higher the “investment risk”, the lower your premiums will be. Although some policies are rated purely on the “investment risk”, many are graded according to how “safe” they are, considering the possibility that the policy will lose value and the premium due will exceed the balance of the cash value.
Most life insurance companies will offer discounts to cover the cost of additional coverage in the event that the insured dies during the coverage period. They do not always offer these discounts to new customers as this may negatively affect their profitability. If you already have life insurance coverage and you need additional coverage, contact several different companies to inquire about possible discounts.
It is important to note that term insurance only provides coverage during a specific time period, such as ten or twenty years. Whole life insurance provides coverage for your entire life time. This type of policy is more expensive than term insurance, because it offers a greater amount of benefits in the event of your death. While the initial cost may be greater, the life coverage that you receive provides a greater benefit in the event of your untimely death. Therefore, whole life insurance is an excellent choice for individuals that require lifelong coverage.