Permanent Life Insurance: The Basics
Learn the pros and cons of different types of permanent life insurance.
Permanent life insurance comes in many shapes and sizes. Before you sign up for a policy, you should look into which is right for your situation. Here's a quick guide to universal life insurance, whole life insurance, variable life insurance, and more.
If you are not sure whether permanent insurance is what you’re looking for, see Life Insurance Options.
Whole Life Insurance
Whole life (sometimes called "straight life") insurance provides a set dollar amount of coverage that can never be canceled in exchange for fixed, uniform payments. Because the payments are the same throughout your life, the premiums are higher compared to your statistical risk of death in the early years of the policy. This is why reserves are built up. Assuming you live a long while after the policy was issued, your payments become lower -- compared to your risk of death. In other words, during the first few years of a whole life policy, insurance companies take in substantially more money than they pay out.
Some of the surplus goes to pay the insurance agent's commission. Some of it becomes your cash reserve, which the company puts in fixed-income investments. After a set time, usually several years, you have the right to borrow against the cash reserve. You can also, of course, cancel the policy and receive its cash surrender value.
Whole life is generally undesirable for younger people with small children who can't afford the high premiums during the early years of the policy.
Universal Life Insurance
Universal life combines some of the desirable features of both term and whole life insurance, and offers other advantages, including:
- Over time, the net cost is lower than whole life insurance.
- You build up a cash reserve, as with whole life.
- You can vary the premium payments, amount of coverage, or both, from year to year. In contrast, whole life requires one set payment amount, which cannot be varied, for the life of the policy.
More information. In addition, universal life policies normally provide you with more consumer information. For example, you are told how much of your premium goes toward company overhead expenses, reserves and policy proceed payments, and how much is retained for your savings. This information isn't usually provided with whole life policies.
There can be other significant advantages to universal life; an insurance agent will be glad to explain them to you.
Variable Life Insurance
Variable life insurance refers to policies in which cash reserves are invested in securities, stocks, and bonds. In a sense, these policies combine an insurance feature with a mutual fund. That means your investment return is tied to the financial markets' performance.
Variable Universal Life Insurance
Variable universal life insurance is a type of whole life insurance that combines the premium payment and coverage flexibility of universal life insurance with the investment opportunity (and risk) of variable life insurance.
|
