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Types of Life Insurance
Whole Life Insurance
Whole life insurance is built to operate like the graph at the right shows. Each time premium on a whole life insurance policy is paid the cash value in the policy grows. That cash value is given a guaranteed interest rate, usually between 4 and 5 percent, depending on insurance company. The policy is set up such that when the policy endows (usually at age 121), your contributions (premiums) and the interest earned will be equal to the original policy death benefit, as illustrated in the graph.
In addition to the guaranteed interest rates on the cash value, a whole life insurance policy
Whole Life Insurance
Whole life insurance is built to operate like the graph at the right shows. Each time premium on a whole life insurance policy is paid the cash value in the policy grows. That cash value is given a guaranteed interest rate, usually between 4 and 5 percent, depending on insurance company. The policy is set up such that when the policy endows (usually at age 121), your contributions (premiums) and the interest earned will be equal to the original policy death benefit, as illustrated in the graph.
In addition to the guaranteed interest rates on the cash value, a whole life insurance policy
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earns dividends. These dividends are based on the annual performance of the insurance company and are not guaranteed. Usually these dividends are used to purchase more insurance. Therefore, the death benefit of a whole life insurance policy that earns dividends will grow as the dividends are paid. There is also an option to have the dividends paid in cash to the policy owner.
Universal Life Insurance
Universal life is a form of permanent life insurance. Similar to whole life, it has a cash value component. The largest difference is that the interest rates that the cash value receives is not guaranteed. The earned interest rate can be changed, similar to the interest rate on a money market account at a bank. Because the interest rate is not guaranteed, negative growth can occur and money can be lost.
In addition to the cash value component, there is also a mortality and expense charge associated with each premium paid. Mortality and expense charges begin at some "current" rate, but can go as high as a "maximum" very high rate.
Universal life is a form of permanent life insurance. Similar to whole life, it has a cash value component. The largest difference is that the interest rates that the cash value receives is not guaranteed. The earned interest rate can be changed, similar to the interest rate on a money market account at a bank. Because the interest rate is not guaranteed, negative growth can occur and money can be lost.
In addition to the cash value component, there is also a mortality and expense charge associated with each premium paid. Mortality and expense charges begin at some "current" rate, but can go as high as a "maximum" very high rate.
There are two major concerns with a Universal Life insurance policy. The first is that the cash value is not guaranteed and can be lost. The second concern is that the insurance company can charge essentially whatever they want as mortality and expense charges. In the event that the charges go up or the cash value goes down, the policy owner may be forced to pay additional premium, lower the death benefit, or surrender the policy.
Variable Universal Life Insurance
Variable universal life insurance is deeply rooted in the framework of universal life. The major difference is that instead of the premium being put directly into a cash value holding account, it is used to buy shares of mutual funds. The value of those mutual funds makes up the cash value of the policy.
These policies are usually sold on the premise that the average return on the stock market is 12%. In addition, the policy owner has the control to invest the cash value however that person deems to be best.
The biggest concern with these policies is illustrated in the graph at the right. The smooth line shows what is usually illustrated as the typical growth on one of these policies. However, the jagged line is what actually happens.
Each month the policy is charged mortality and expense charges. These are taken directly from the cash value, by selling shares. This becomes a problem when the shares are at a low value. Selling shares at a low value means that more shares have to be sold to make up for the mortality and expense charges than if the share were highly valued. Therefore when the
Variable universal life insurance is deeply rooted in the framework of universal life. The major difference is that instead of the premium being put directly into a cash value holding account, it is used to buy shares of mutual funds. The value of those mutual funds makes up the cash value of the policy.
These policies are usually sold on the premise that the average return on the stock market is 12%. In addition, the policy owner has the control to invest the cash value however that person deems to be best.
The biggest concern with these policies is illustrated in the graph at the right. The smooth line shows what is usually illustrated as the typical growth on one of these policies. However, the jagged line is what actually happens.
Each month the policy is charged mortality and expense charges. These are taken directly from the cash value, by selling shares. This becomes a problem when the shares are at a low value. Selling shares at a low value means that more shares have to be sold to make up for the mortality and expense charges than if the share were highly valued. Therefore when the
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shares become highly valued again, there are not as many shares in the policy and it does not reach the value it was previously at. Typically this type of policy has a downward spiraling effect until the policy no longer has any cash value.
Term Life Insurance
Term life insurance covers the insured person for a term. Terms can be as short as 1 year or as long as 30 years. The monthly premiums for term life insurance are relatively inexpensive compared to the monthly premiums for a permanent life insurance policy, especially when purchased at a younger age. As the insured gets older, the policy can usually be renewed, but at a higher rate. This is illustrated in the graph at the right.
The biggest advantages to term life insurance are that it is inexpensive and in some cases convertible to permanent life insurance. Therefore, after determining how much life insurance they would like, many of our clients purchase a portion of their life insurance in
Term life insurance covers the insured person for a term. Terms can be as short as 1 year or as long as 30 years. The monthly premiums for term life insurance are relatively inexpensive compared to the monthly premiums for a permanent life insurance policy, especially when purchased at a younger age. As the insured gets older, the policy can usually be renewed, but at a higher rate. This is illustrated in the graph at the right.
The biggest advantages to term life insurance are that it is inexpensive and in some cases convertible to permanent life insurance. Therefore, after determining how much life insurance they would like, many of our clients purchase a portion of their life insurance in
term and a portion in permanent insurance. As their salaries go up, they convert their term to permanent life insurance.
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Life Insurance