Whole life insurance—or permanent or cash-value life insurance—is often referred to as one part insurance product and one part investment vehicle.
Which makes sense, as the two most common reasons people purchase this form of insurance are:
- so they can be covered for the rest of their lives
- so they can leave an inheritance to their survivors after they pass away
Buying it forces them to sock away money on a regular basis.
That's not to suggest that these are the only elements of whole life insurance that attract people. Here are a few more: when it comes to most forms of this product, premium payments remain fixed for as long as the policy remains "in force." Also, a policy can't be canceled as long as a person continues to pay his or her premiums on time.
Traditional vs. Interest-Sensitive
That's just a bare bones look at what whole life, permanent, and cash-value insurance tends to offer, though. Beyond those basic elements, the variations of the product cover quite a lot of ground in terms of when and how premiums are paid, and how premiums are used.
Those variations all are part of two categories: traditional and interest-sensitive. And beyond that, each of those categories generally is available in either fixed-dollar or variable form.
Let's begin by looking at the different forms of traditional whole life insurance before defining what interest-sensitive, fixed-dollar, and variable mean.
The Six Types of Traditional Whole Life
1. Non-Participating
This type of traditional whole life insurance is the most straightforward. Another word you could use to describe it would be inflexible. They're good words to use here. That's because pretty much all of the components that make up these policies are set when they're issued. They can't be changed after that.
That may sound like a bummer, and in some ways it is, but there are some positives too. For instance, some people like that the costs associated with non-participating plans are fixed. Plus, the out-of-pocket premium payments tend to be low.
2. Participating
This type of traditional whole life insurance is a lot like the non-participating type. The cash value, death benefits, and premium payments tied to its policies are set at the time of issue. They usually remain stable for the remainder of the policyholder's life.
The big difference here is that participating plans pay out dividends in certain situations. Not only that, but these dividends can be paid out in a number of ways. One of them is in cash. Other options include using them to reduce the cost of future premium payments or using them to buy additional amounts of paid-up whole life insurance or even one-year term insurance.
Participating whole life insurance doesn't trump its non-participating counterpart in every area. One example being that, in general, the premiums attached to participating policies are higher than those associated with non-participating ones.
3. Indeterminate Premium
Indeterminate premium policies also are quite similar to non-participating ones. Their cash values and death benefits are set at issue. They can't be changed for the remainder of the life of the policy. What sets indeterminate premium policies apart from the types mentioned earlier is that the premium payments are adjustable by the insurer.
The premium that's determined at the beginning of a policy's life is tied to estimates the insurance company makes about its investment earnings, expense costs, and other factors. If those estimates change, the company will adjust premiums to take into consideration the new climate.
Luckily, the adjusted premiums will never go above the "maximum guaranteed premium" that's laid out in each policy.
4. Economic or Economatic
If you've wanted to purchase life insurance that combines elements of the (participating) whole life and term life varieties, an economic or economatic policy may be for you.
Economic whole life insurance blends these two types of products by taking the dividends that come along with participating plans and using them to purchase supplemental coverage. Ln most cases this consists of some amount of term insurance. The benefit of all of this is that it often results in a higher death benefit. But that's not guaranteed.
5. Limited Payment
Sometimes referred to as "limited pay." This kind of traditional whole life insurance can be of the participating or non-participating variety. It allows policyholders to gain access to a lifetime of coverage while paying premiums for a specific number of years rather than throughout the life of the policy.
The premium payments associated with this type of policy are higher than those that are tied to other whole life products. But the benefit is that they're "paid up" at a much earlier age (such as 65, 70 or 80).
6. Single Premium
Traditional whole life insurance is very similar to limited payment plans. The difference is a single, substantial, up-front payment instead of paying premiums for a specific number of years.
You don't have to make any premium payments after the first one. But you may have to pay certain fees should you decide to "cash in" during the first few years they're in force.
The Four Types of Interest-Sensitive Whole Life
The four varieties of interest-sensitive whole life insurance don't guarantee the benefits related to them for the life of the policy in question.
Instead, for interest-sensitive policies, insurance companies make use of the investment earnings that are related to these products so they can better reflect current interest-rate conditions and fluctuations.
Why is this a good thing for people who decide to purchase some amount of interest-sensitive insurance? The main reason is that interest-rate gains are more quickly reflected in these sorts of policies than they are in their traditional whole life insurance counterparts.
The flip side of that, of course, is that interest-rate dips also are reflected more quickly in these kinds of policies than they are in the policies mentioned earlier.
1. Universal
Universal life insurance often is considered the most flexible of all of the whole life varieties that are available. That's because it separates the components that traditionally are combined to create a traditional whole life policy—cash value, death benefit, and premium payment—and deals with them individually.
What that means for you is that you're able to alter things like how much your premium payments are and when you pay those premiums. Also, you can alter the amount of coverage your policy provides.
One word of warning often shared in relation to universal life insurance is that dealing with staying on top of all of the above can be a challenge. If you reduce how much you pay for your premiums too much, or if you fail to pay them regularly enough, a number of negative things could happen to your policy. For example, its cash value could diminish or it could lapse entirely.
2. Current Assumption
Here's another type of interest-sensitive whole life insurance that has some commonalities with the category's universal product.
In the case of current assumption life insurance, the insurance provider decides how much or little you should pay when it comes to your policy's premiums. Also, it may raise or lower those premiums over time, depending on its estimates related to future investment earnings or expenses
Other than that, you're free to borrow against the accumulated cash value of current assumption policies just as you are with traditional whole life policies. Also, the death benefit that's attached to these policies remains stable as long as they are in force.
3. Excess Interest
This form of interest-sensitive whole life insurance is similar to the universal variety detailed earlier, with one significant difference: the premium payments associated with it are fixed. In other words, you're required to make regular premium payments just like you would if you took out one of the traditional whole life policies mentioned earlier.
The "excess interest" that gives this insurance product its name has to do with the fact that any additional interest that's related to these policies is used to bolster their cash values.
4. Single Premium
Like the single premium product, the key aspect of the single premium version of interest-sensitive whole life insurance is that policyholders make just one payment to obtain it.
Or they do as long as the interest rates related to their policies don't drop, as in such cases they may have to hand over additional premium payments.
Aside from that, the initial interest rate that's attached to this type of single premium policy is fixed for a limited time (most often between one and five years).
Fixed-Dollar vs. Variable Options
Many of the policy types touched on in this article can be bought in one of two ways. They can be bought on a fixed-dollar basis or they can be bought on a variable basis.
For variable policies, the cash value is referred to in units that can rise or fall in value depending on where your premiums are invested and how those investments pan out.
A number of risks come along with taking the variable-basis path. If the investments tied to your policy don't do well, you could be required to hand over higher-than-usual payments to keep it from being terminated.
In addition, the many fees and charges that go hand in hand with variable policies can put a real damper on the tax advantages that are associated with them.
If you don't have a life insurance policy, compare rates on life insurance from multiple companies. That's the best way to find an affordable plan that protects you and your spouse.
References:
- The Different Types of Permanent Life Insurance Policies
- Types of Life Insurance Policy
- Participating Vs Non-Participating Whole Life Insurance
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