Permanent Life Insurance

There are two basic types of life insurance, term life insurance and permanent life insurance, also referred to as whole life insurance. Some basic differences between term life insurance and permanent life insurance policies are as follows:

1. Term life insurance expires and is no longer valid after a set amount of time, typically between ten and thirty years. Permanent life insurance is in place for the life of the policyholder.

2. With a permanent life insurance policy, as long as premium payments are current, payout is assured at the end of the policy, which is usually at the policyholder's death. If a policyholder is still alive at the close of a term life insurance policy, there is no payout.

3. Permanent life insurance policies accrue cash value over the life of the policy. Term life insurance policies do not.

There are several types of permanent life insurance to choose from, and sorting out permanent life insurance quotes can be confusing. They include:

1. Whole life insurance is the most common type of permanent life insurance policy. It remains in force during a policyholder's lifetime and offers a death benefit as well as cash value. Some policies will also pay out excess premiums in the form of a dividend.

2. Universal life insurance is more flexible than whole life insurance. It gives the policyholder the option of adjusting the amount of death benefit and/or premium payments, within limits, to fit his or her situation. For example, if a policyholder's economic situation changes and there is enough money in the cash value account, he/she could reduce or cease paying premium payments. However, if the cash value savings get used up, the policy could lapse and the insurance could be terminated.

3. Variable life insurance is a type of permanent life insurance that offers a variety of investment options in addition to a death benefit. If investments perform well, the value of the policy may increase. If not, cash value and the death benefit could decrease, or higher premiums may need to be paid to keep the policy in effect.

4. Variable-universal life insurance combines the benefits of variable and universal life insurance policies. The investment risks and rewards of variable life insurance are paired with the ability to adjust cash value and death benefits that are commonplace in universal life insurance.

Whole Life Insurance

Whole Life Insurance is in place for the life of the policyholder as long as premiums are made and the policy is not surrendered. Types of whole life insurance policies include:

• Nonparticipating Whole Life Insurance A nonparticipating whole life insurance policy has a fixed premium payment amount for the duration of a policyholder's life. Premium payments are relatively low. This policy does not pay dividends.
  
  
• Participating Whole Life Insurance A participating whole life insurance policy pays dividends. Dividends can be paid in cash, used to reduce premium payments, left to accumulate at a predetermined rate of interest, or used to purchase additional insurance, which will increase a policyholder's face amount of coverage.
  
  
• Level Premium Whole Life Insurance Premium payments are at a fixed amount and required to be paid as long as the insured is living. In early years, premiums are more than enough to pay for the cost of insurance protection. Excess premiums and interest earnings accumulated from early years make up for when premiums alone are not enough to pay for the cost of maintaining the policy. The extra premiums are held by the insurer, establishing the "cash value" of the policy.
  
  
• Limited Payment Whole Life Insurance With this type of permanent life insurance policy, protection is offered with a set number of premium payments. Typically, premiums are set over a fixed number of years (i.e., ten or twenty years) or the policy is paid up entirely at a certain age (paid up at age 65 or age 75). Since premiums are paid over a shorter period of time, premiums will be higher than with a level premium whole life insurance policy.
  
  
• Single Premium Whole Life Insurance The entire policy is paid with a larger premium due at issue. The policy has immediate cash value. Because of the large premium amount due at issue, this product is usually considered more of an investment-oriented purchase than most permanent life insurance policies.
  
  

  Universal Life Insurance

  

  Universal life insurance is a more flexible type of permanent life insurance than the insurance commonly referred to as "whole life insurance." In universal life insurance, a portion of premiums is invested by the insurer. A guaranteed minimum interest rate applies to the policy, which means the insurer guarantees a minimum return on the invested money.

  Universal life insurance policies are characterized mainly by their flexibility in:

  Premiums With a universal life insurance policy, the policyholder has complete freedom in choosing how much premium to pay and when to pay it. The more premium that is paid, the more cash value that is accumulated. Paying only the minimum billed premium will allow for little cash value accumulation. This could work to advantage if a policyholder's economic situation changes. If no premium is paid by the policyholder, the minimum amount required to keep the policy in place will be taken from the accumulated cash value. If no cash value remains, the policy will be canceled.

  Death Benefits Universal life insurance generally allows the policyholder to choose from two death benefit options. With the option that costs less, the death benefit is paid out of the policy's cash value. The more cash value that is built up over the years, the less the insurance company has to pay out upon your death. With the option that costs more, the face amount of the policy is paid out, in addition to the accumulated cash value.

  Access to Cash Value To access cash value, you can make a partial withdrawal of the savings, you can take a loan out on the policy, or you can cancel the policy and take the accumulated cash value. However, withdrawing savings may reduce the death benefit (this varies by policy), any loans taken out on the policy will have to be paid back with interest, and canceling the policy could result in high administrative fees, depending on your insurer's policies regarding cancellation.

  One main advantage of universal life insurance is that it gives you the flexibility to adjust the death benefit. Another advantage is that you can also make smaller or larger premiums depending on your financial circumstances. However, if your premium payments are too small for too long, your cash value could deplete to zero, and your insurance policy will lapse. Also, if investments perform poorly early on, you could be forced to pay higher premiums in later years.

  Variable Life Insurance

  Variable life insurance is a form of permanent life insurance that guarantees the beneficiary permanent protection, provided premiums are current. Variable life insurance is called "variable" because a portion of the premium can be allocated to a variety of investment funds within an insurer's portfolio, such as an equity fund, a money market fund, or a bond fund. Where the money is invested within the portfolio is entirely up to the insured, so this type of policy provides the policyholder more control than other types of permanent life insurance policies. However, with more control comes more risk. Depending on where the investment portion of funds is allocated, the value of the death benefit and cash value may fluctuate up or down. The death benefit generally has a minimum guarantee regardless of how investments perform, but cash value is rarely guaranteed. Because of the investment component, a variable life insurance policy is considered a securities contract.

  Advantages of holding a variable life insurance policy include:

  • The policyholder has the option of paying with scheduled or flexible premiums. Scheduled premiums are paid in fixed amounts at a set time. Flexible premiums can be paid at varying times in varying amounts.
  • The insured can participate in a variety of investment options tax-free unless the policy is surrendered. Interest earned on the investments can be applied toward premiums.

  Disadvantages of choosing variable life insurance include:

  • If investments perform poorly, less money becomes available for premiums, and you may have to pay more than you can afford to keep the policy in force. If this occurs, the death benefit of the policy may decline.
  • You cannot withdraw from the cash value of a variable life insurance policy during your lifetime.