a.k.a Whole Life Insurance and Universal Life Insurance
There are literally thousands of different life insurance policies offered by hundreds of life insurance companies. But life insurance really comes down to just two basic types: term life and permanent life. Despite the myriad of options available, they are all either term or permanent at their core.
The most common variations of permanent life insurance are whole life, universal life, and variable life. All three can be structured to provide “lifetime coverage,” hence the name permanent. They all have certain characteristics in common, such as:
- Coverage can be extended to age 121.
- They can accumulate cash value.
- The cash value is tax-deferred.
- They often allow for policy loans, or borrowing against the cash value.
- The initial cost can be significantly greater than term life.
- The cumulative cost over many years may be lower than term life.
Who buys permanent life insurance?
Permanent life insurance has its place and is a good fit for many people. It may be a good option for you if you have any of the following needs:
- Long term needs – If you need coverage beyond the longest term life policy you can buy, which is currently 30 years.
- Estate planning – If you have a sizable estate that may be subject to estate taxes.
- Tax-deferred growth – Permanent life policies can be structured to grow cash values within the policy. This growth is usually tax-deferred.
Whole Life Insurance
Whole life insurance is a straightforward policy with a premium that stays the same for the life of the policy. Whole life policies provide a death benefit and have a cash value component.
Pros
- Lifetime death benefit
- Cash value growth
- Fixed interest rate
Cons
- Most expensive type
- Not very flexible
- Has fixed premiums and death benefit
Universal Life Insurance
Universal life insurance is a more flexible policy that allows you to adjust the premium amount and death benefit. It also has more optional features which can help you customize the policy to better fit your needs.
Pros
- Lifetime death benefit
- The most flexibility
- Cash value growth
- Fixed interest rate
Cons
- More expensive than term
- Interest rate is often low
- Variety of options can be confusing and costly
Variable Universal Life Insurance
Variable universal life insurance is similar to universal life in many ways. The main difference is the premium payments can be allocated to variable investment accounts. This gives the policy greater potential for cash value growth.
Pros
- Lifetime death benefit
- Flexible premiums
- Greater potential for cash value growth
- You choose where the cash value is invested
Cons
- Policy performance is closely tied to investment results
- The policy could be at risk if investments fail
- Premiums may increase to keep the policy in force
- Policy often has higher expenses than universal life
Indexed Universal Life Insurance
Indexed universal life insurance is similar to variable universal life. The main difference is the investment portion of the policy is done through stock market indexes. This can give the policy less downside risk (and upside potential) than variable universal life.
Pros
- Lifetime death benefit
- Flexible premiums
- Cash value growth
- Downside market protection
Cons
- Policy performance is closely tied to investment results
- Premiums may increase to keep the policy in force
- Policy often has higher expenses than universal life
- Cash value growth is more limited than variable universal life
Take a closer look at the pros and cons of permanent life insurance as well as a fun comparison of permanent life and term life. And let us know if you need assistance determining which type of life insurance is best for you.
