To briefly recap our last post, permanent life insurance can provide lifetime protection with the ability to accumulate a cash value on a tax deferred basis. Unlike term life insurance, which is fairly clear cut and straight forward, permanent insurance can be a bit more complex.
There are a few different common types of permanent life insurance products. While there is no one size fits all answer, each of these types of insurance has benefits for specific situations.
Without further ado, let’s dive into the major types of permanent life insurance:
Whole Life / Ordinary Life policies are likely what most people default to when thinking about life insurance. With a whole life policy there is a specified death benefit, the insurance company guarantees a minimum cash value rate, and the premium payments are even throughout the duration of the contract. These policies tend to be more appropriate for people with a lower risk tolerance because they are more predictable.
Along with the guaranteed death benefit and cash value, participating whole life policies can provide you with the benefit of earning “dividends.” Insurance dividends are just a way for the insurance company to share profits due to favorable results with the client. You can take these dividends as a cash payout, use them to help pay premiums, or add them to your policy to increase the cash value and death benefit.
Variable Life is considered riskier than whole life because it’s value is less predictable, so it is more appropriate for someone with a higher risk tolerance. Similar to whole life, the premium payments are even throughout the duration of the variable life contract. However, with variable life, you are able to invest your premiums and cash value among various sub-accounts for potential long term growth. The sub-accounts offer different investment option types with varying risk levels (think of these as being similar to mutual funds).
Once allocated, the cash value of your insurance policy will fluctuate up and down with the selected investments (just like a regular brokerage or IRA account would fluctuate when you invest your money). This cash value is added to a guaranteed minimum death benefit at the end of your policy. There will be a higher death benefit and cash value if your investments perform well, but the policy can also lose value if your investments perform poorly (but the final value cannot fall below the guaranteed minimum death benefit).
Universal Life is a flexible life insurance policy that can be great for people with unsteady and unpredictable income or expenses (or really anybody who desires more flexibility in premium payments). Unlike whole and variable life insurance where you pay fixed premiums based on a predetermined schedule, universal life gives you the option to change your premium payments as you go.
As long as you are within the contract limits you may pay higher or lower premiums at any time after the initial payment. This allows you to make higher premium payments when you have extra money and lower premium payments when you are short on cash. Any excess payments will increase the cash value which can be used to help pay premiums in the future (if you opt to make lower payments yourself in the future), or to raise the death benefit of the policy.
Variable Universal Life is a mixture of variable and universal policies. As with variable life, you are able to invest premiums and cash value in sub-accounts for potential higher long term benefits if the sub-accounts perform well (but you also have the risk of losing money if your sub-accounts perform poorly).
The similarity to a universal policy comes in the form of flexible premiums. You have the option to pay higher or lower premiums based on your insurance desire and current cash flow situation. This type of policy provides you with the greatest level of flexibility due to various options on how to invest premiums as well as when to make premium payments.
Similar to the term vs permanent life insurance conversation, one of these options is not necessarily better than the others. They are just different, and serve different purposes.
There are other factors to consider beyond just the insurance type when selecting an appropriate life insurance policy, but a good first step is to determine which type of policy most closely matches your needs.
By determining the type of policy that is the best fit from a higher level, you are eliminating a large number of life insurance contracts that would be inappropriate for you from the get-go. Narrowing down the insurance universe to a specific type of policy can reduce the stress of finding the right tool for the job, making your overall investment experience simpler and more enjoyable.
In our next post we will be discussing some strategies to estimate your life insurance needs, to ensure you have the proper amount of coverage for your specific situation.
As always, if you have any questions please reach out and we will be happy to provide you with additional information.
Derek and Ben
Co-Founders and Owners of Aspire Wealth
*Please note, this is not intended to be advice. We are not insurance experts and you should work with your financial planner prior to implementing any strategies we’ve discussed.
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