Whole Life Insurance
Whole Life Insurance (also known as straight life, ordinary
life, and traditional permanent insurance) is designed
to provide coverage for your entire lifetime unlike term
insurance which provides protection for a specified time
period. To keep the premium level, the premium at the
younger ages exceed the actual cost of protection. This
extra premium builds a reserve (cash value) which helps
pay for the policy in later years as the cost of protection
rises above the premium. Whole life policies stretch the
cost of insurance over a longer period of time in order to
level out the otherwise increasing cost of insurance. Under
some policies, premiums are required to be paid for a set
number of years. Under other policies, premiums are paid
throughout the policyholder’s lifetime.
Universal Life Insurance
Universal Life Insurance is the most flexible of all the
various kinds of policies because it treats the elements
of the policy separately; universal life allows you to
change or skip premium payments or change the death
benefit more easily than any other policy. It works by
treating the three elements of the policy — premium,
death benefit, and cash value — separately. Cash values
are accumulated by crediting premium payments and
interest to a fund from which deductions are made
for expenses and cost of insurance. Interest rates
are linked to an external index such as Treasury bills.
Because the cash value element of this type of policy
is interest-rate sensitive, predictions of future costs are highly dependent upon the accuracy of interest rate projections. The policy can also be structured to operate like term insurance.
Variable Life Insurance
Variable Life Insurance has a death benefit that varies in
relation to the investment experience of the assets underlying
the policy. A higher rate of return on the invested fund will
cause the death benefits to increase, while a low or negative
rate will cause the death benefits to decrease. Variable Universal Life Insurance combines the flexibility of universal life insurance with the investment account features of variable life insurance.