Decisions regarding life insurance can be difficult, as can understanding the differences between the policies that are offered. Sometimes we feel mired in the terminology and making headway may seem impossible. However, once we marry, have a family, buy a house, and take on other financial obligations, life insurance becomes a necessity. Although it may be unpleasant and somewhat unnerving to focus on our own death, the reality is that we must provide for the future of our loved ones. That is what life insurance does – it enables those we love to carry on without us. It provides them with the financial resources to cover the day-to-day expenses, make mortgage payments, plan for college, and take vacations. We have many options when it comes to life insurance, and whole life insurance is one of those options.
Whole life insurance is, as it says, a permanent insurance for your whole life. That is the primary benefit of whole life insurance – that the payout is guaranteed. You don’t have to worry that you may be uninsurable after a specific time period runs out, like you do with term life insurance. This piece of mind comes with a price, however, a high price.
The premiums you pay for a whole life insurance policy may be several times higher than what you would pay for a term life insurance policy with the same benefit amount. This is because a portion of your premium goes into an account that builds cash value over time. So you are not only getting an insurance policy, you are also getting an investment account.
The three most common types of whole life insurance are traditional whole life, universal life and variable.
Traditional whole life insurance
With traditional whole life insurance, the amount of money you pass on to your beneficiaries is guaranteed, regardless of how long you live. These policies also include an investment account component, which accrues a cash value that you can withdraw or borrow against. Most traditional whole life policies offer a withdrawal clause, which will allow you to cancel your coverage and receive a cash surrender value.
Universal life insurance
Universal life insurance is a type of flexible permanent life insurance. It offers the low-cost protection of term life insurance, along with a savings account feature like whole life insurance. You are able to review and alter the death benefit, the savings element and the premiums as your circumstances change. In addition, unlike whole life insurance, universal life insurance allows you to use the interest from the investment account to help pay your premiums.
Variable life insurance
Variable is the third type of permanent life insurance, and also the most expensive. It differs from the other two because it allows you to participate in various types of investment options such as stocks, bonds, and money market funds, while not being taxed on your earnings. Like universal life, you can also apply the interest earned on these investments towards the cost of your premiums. The downside of variable life insurance is the investment risk. If the invested funds perform poorly, then there is less money available to pay the premiums. In that case you may have to pay more than you can afford to keep the policy in force. If your investment accounts perform really badly, the payout for the death benefit may also decrease. Lastly, you cannot withdraw from the cash value in the investment accounts during your lifetime, as you can with traditional and universal life insurance policies.
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