Types of life insurance
There are several different types of life insurance. The first category is the least complex and is called term life insurance. A term life insurance policy simply provides coverage for a set period of time (e.g. a term you choose), for whatever benefit amount you select. When that period is over, usually 10-30 years, so is the coverage. For many, term insurance can be an economic and temporary form of financial reassurance. Coverage can sometimes be renewed after the initial term period expires, although typically at a much higher cost, and in most cases, after a new required medical exam. Term insurance does not have any component of building a lasting financial asset, but it does provide a level of coverage until the term expires.
The other primary type of life insurance policy is called permanent life insurance. Here, life insurance coverage stays with you forever, as long as your payments stay current. Your beneficiaries, whether loved ones or a designated charity, will receive a sum of money when you pass away, no matter when that occurs. Within the permanent life insurance category, there are two main variations: whole life insurance and universal life insurance.
What are the similarities between whole life insurance policies and universal life insurance policies?
Both permanent products are life insurance plans that can last your whole life and in addition to the insurance coverage, both build up a cash value, money that you can use during your lifetime. You can’t outlive the guaranteed life insurance protection, provided that you keep the policy in good shape by making sure that your payments are up to date. A portion of each premium (the amount you pay for your policy) goes towards building your cash value asset.
Aside from these similarities, whole life and universal life have several differences. One variety might suit a different type of person better than the other, and ideally, you would consult with a qualified financial professional to figure out which is more in line with your needs. Here, we list a few considerations.
What are the key differences between whole life insurance and universal life insurance when it comes to cost?
Whole life has guarantees and costs a guaranteed level amount of money each month
In general, a whole life insurance policy is best suited to the type of person who wants guarantees. So, a whole life insurance policy tends to cost more in the early years in order to support the guarantees it provides. You’re buying a substantial financial product that will instantly start building up into a permanent asset — as well as insure you throughout your entire lifetime — and this comes along with several guarantees. These include guaranteed level premium payments, meaning that the payments you make each month (or year, if you prefer) won’t ever rise. As the cost of living goes up throughout the years ahead, you can be certain that your whole life insurance premium will remain identical every month and will never cost more.
In addition to this guaranteed premium, whole life also provides guaranteed cash value. As these values build throughout the course of the policy, a loan or withdrawal may be taken to cover future premiums, meaning your whole life policy could even become a self-financing asset. Although not guaranteed, you may also receive annual dividend payments from the insurance company if it’s a mutual insurance company. Those dividends would boost the cash value asset even further.3 Also, the interest payments within the policy aren’t taxed as income. The combined package — guaranteed death benefit for your loved ones whenever you pass away, and cash value that grows in a tax-advantaged way — gives you flexibility to handle life’s unexpected events. Always keep in mind that accessing the policy’s cash value may affect how much your beneficiaries receive after you’re gone.
How is the cash value different in each type of life insurance policy?
Whole life cash values are guaranteed
The cash value insurance you build with whole life insurance is a financial asset, and one you can access and use during your lifetime. You can borrow and/or withdraw from it to supplement retirement income, help offset college tuition costs, use it as collateral for a loan and much more. Your cash value will grow at an interest rate guaranteed from the insurance company, with additional growth provided by a non-guaranteed dividend. Dividends represent part of the insurance company’s profits and are distributed to its policyholders. Over time, this can grow your cash value account very substantially. Note that loans and withdrawals from the policy can reduce the amount of money you will eventually leave to your beneficiaries.
Universal life cash values and premiums can fluctuate
In a universal life insurance policy, the cash value growth is dependent upon the current interest rates associated with the specific type of policy: variable, indexed, or current assumption universal life policies will all see different growth patterns. How much premium you pay into the policy and how much you tap into the cash value will also play a role in the overall growth. There is some risk associated with universal life because interest crediting rates, cost of insurance rates and investment performance can change and will impact your cash value. It’s important to secure coverage with a company that offers a guaranteed interest rate. With Guardian, the interest rate is guaranteed to be at least 2.5% of the life of the policy. Speak with a financial professional to learn more.
If a universal life policy is underfunded — meaning the amount of premiums paid in are less than the current charges, the difference is then deducted from the cash value. Depending upon your specific contract, if the cash value falls to a certain point, your policy can lapse.
You should stay in touch with your financial professional to make certain that you keep the account, and your life insurance coverage, in healthy condition.
How do they differ when it comes to dividends?
Whole life can benefit from dividend payments
A whole life policy purchased from a mutual insurance company may receive annual dividends. These depend upon the profitability of the insurance company that particular year and are not guaranteed. However, some mutual companies have track records of delivering dividend payments virtually every year. Dividends are often used to purchase additional insurance and to grow your death benefit, the amount of money your beneficiaries get and cash value simultaneously. You may also use dividends and the additional coverage they purchase to pay all or a portion of your future premiums. Other options are to receive the dividends in cash each year, or accumulate them within the policy and withdraw them at a future date.
Universal life does not benefit from dividend payments
While universal life does enable you to benefit from interest rates when they’re working in your favor (and lose value when they’re not), in general, you do not receive dividend payments from the insurance company.
Both whole and universal life insurance policies can be complex. Before deciding which type of life insurance policy is best for you, meet with a financial professional to check out the options and discuss what best fits your needs.