Permanent life insurance, or Whole Life, not only offers protection throughout the course of your life but also serves as a fruitful investment.
According to the Life and Health Insurance Foundation for Education, there are four types of whole or permanent life insurance: traditional whole life, universal life, variable life and universal variable life.
Traditional whole life
Traditional whole life has a level death benefit and premium, throughout the life of the policy. In order to maintain a level premium, the premium charged to the policyholder is higher to start.
This is because the insurance company invests the extra money received in a pool fund to supplement the level premium in order to afford the cost of life insurance as you age. Because as you get older, the potential risk of you dying is greater.
This process of over-payment comes with some limitations. Once the cash value reaches a certain amount, the money is then made available to the policyholder that they can borrow against.
Universal life (UL)
A universal life policy allows you to increase or decrease the death benefit amount to fit new needs. The policy also provides greater flexibility when it comes to paying premiums.
Universal life has a cash value account that is tied to the rate of interest in the money market. After money has accrued in the account, the policyholder can use the cash value to determine the amount of premium they would like to pay (above the minimum payment) and when.
Variable life (VL)
This type is tied into an investment portfolio (stocks, bonds, money market mutual funds) that builds cash value depending on how well the stock market performs.
Generally, a high return on the cash value is not guaranteed, and with some policies, neither is the death benefit. This is why its best to find a policy that at the very least guarantees the death benefit will still be there, regardless of how well the cash value performs.
Variable-universal life (VUL)
It is an alternative to variable life that combines the features of a universal policy with a variable life policy. It has the investment component coupled with the ability to adjust the death benefit and the amount of premium you wish to pay.
The Insurance Information Institute (III) notes that the amount you’ll likely be paying for a policy is dependent on the cost per $1,000 of death coverage. Also, the premium for a whole life policy is higher than a term life policy. In some cases it can be five to ten times higher.
If you’re buying a cash value policy such as variable life or variable universal life, financial planner for MetLife, Tony Franks, says that it is especially important that customers research the companies they intend to buy a policy from.
“You should look at the financial strength of the companies along with their track record of service,” said Franks. “These products can be complicated, so you need to talk to an agent who knows how they work.”