Whole Life Insurance
Whole life insurance covers you as long as you live. You have to pay the same amount of premium for a specific period to receive the death benefit. Normally, this policy is kept in force for the rest of your life, regardless of how long you may live. This type of insurance provides life insurance coverage with a savings feature. As a result, you may end up paying higher premiums in the beginning compared to term life insurance. (To read more about insurance types, see Buying Life Insurance: Term Versus Permanent.)
Here, your insurance company puts part of your insurance money in a high interest bank account. With every premium payment your cash value increases. This savings element of your policy builds up your cash value on a tax-deferred basis. In a way, the presence of guaranteed cash values makes this policy worthwhile because you can borrow against your cash value or surrender your policy to get the cash value in hard cash.
You can also opt to participate in the surplus of your insurance company and receive the dividends annually. Here again, you have the choice to either get your dividends in cash, or let them accumulate interest. You may also use your dividends to reduce your policy's premiums or buy additional coverage. Consult your insurance advisor before buying a whole life policy from a particular insurance company because dividends are not always guaranteed.
Whole life insurance is made to fulfill an individual's long-term goals and it is important that you keep it in force for as long as you live. It is advisable to buy whole life insurance when you are younger so that you can afford to pay for it in the long term. Unlike term insurance, the level premiums, fixed death benefits and the attractive living benefits (like loans and dividends) make this policy quite expensive.
In conclusion, you practically pay premiums throughout your lifetime and make use of the cash value benefits while you are alive and upon death since your nominees get the death benefits. Whole life insurance is highly suitable for long-term responsibilities like a surviving spouse's income needs and post-death expenses.
Universal Life Insurance
This policy is also termed "adjustable life insurance," because it offers more flexibility compared to whole life insurance. You have the liberty to reduce or increase your death benefit and also to pay your premiums at any time and in any amount (subject to certain limits) after your first premium payment has been made.
Here, you can increase the face value of your insurance coverage. But, you need to pass a medical examination to qualify for this benefit. Similarly, you may decrease your coverage to a minimum amount without surrendering your policy. However, surrender charges may be applied against the cash value of your policy.
When it comes to the death benefit, you have two options: a fixed amount of death benefit or an increasing death benefit equal to the face value of your policy, plus your cash value amount.
You also have the opportunity to change the amount and frequency of premium payments. So, you can increase your premiums or may also even pay a lump sum according to the specified limit in the policy. As you know, part of your premium minus the cost of insurance is put into an investment account and the interest therein is credited to your account. In this way, the interest grows on a tax-deferred basis, which increases your cash value.
In case of a financial hitch, you can reduce or stop your premiums and use your cash value to pay premiums. Nevertheless, there should be enough money accumulated in your cash value account to cover the premium payments. Make sure to discuss the status of your cash value fund with your insurance advisor before stopping the premiums. Your policy may lapse if you have ceased to pay premiums and have insufficient cash value to cover the cost of insurance.
The alternative of policy loan is an added perk in universal life insurance. It is important that you do not make repeated withdrawals from your accumulated fund. This may reduce the cash value amount and will render you helpless at the time of genuine need. Another good thing about universal life insurance is that your insurance company discloses the entire cost of insurance to you. This gives you an idea on how your policy works.
The downside of a universal life insurance is the interest rate. If the policy performs well, there are chances of potential growth in savings fund. On the other hand, the bad performance of your policy means the estimated returns are not earned. Hence, you end up paying higher premiums to get your cash value account going. Second, surrender charges may be levied at the time of terminating your policy or withdrawing money from the account.
Universal life insurance offers all-round protection to your loved ones, thanks to its security, flexibility and variety of investment options. In times of low liquidity, you can alter your premium payments or may even withdraw from your cash value fund. In addition, you can increase or decrease the face value of your insurance as per your circumstances.