No one has ever claimed that life insurance is easy to understand. Term insurance is the most straightforward, offering the purest protection relatively inexpensively for people in most stages of life.
But some cases, it may make sense to pay for permanent insurance, which is far more expensive and complex.
If you’re considering purchasing a policy, it’s a good idea to know what you’re getting into. Here is an introduction to the three main types of permanent insurance: whole life, universal and variable life.
Whole life insurance is the most basic type of permanent insurance. It has a savings component and a death benefit. The savings component is called the cash value.
“Whole life is more expensive than term insurance, but it has more built-in guarantees with regard to your death benefit — the guarantee of a cash value at a future date. Because of all those guarantees, you have a higher ongoing cost or premium,” says Russell Fox, a Certified Financial Planner with Apex Wealth Management Group in Oxnard, Calif.
Universal life insurance
“Universal life insurance is a blend between whole life and term. It does have cash value accumulation, and it can be tied to a fixed interest rate like a CD that will adjust annually,” says Fox.
Because it has an investment component, universal life is a more aggressive approach than whole life, but it generally offers fewer guarantees than whole life. Because of that, it can be less expensive.
Universal life offers consumers some flexibility in the amount they pay toward the premium, and they can also use the savings portion toward paying for the insurance coverage.
Variable life insurance
A third main type of permanent life insurance, variable life insurance, offers life insurance protection for the duration of your life with more investment options, including equities. Its structure is like that of universal life, but the value of your policy can go up or down with the value of the underlying investment choices.
After a particularly brutal bear market, like the most recent one, these types of policies look extremely unattractive.
“You can end up in a double negative situation, where your investments are losing money and the cash value is being eroded by premium payments. Without adding more money on top, the policy could lapse,” says Fox.
“You do have permanent coverage for the rest of your life, as long as you keep the policy with an adequate amount of cash value in it. Then it can stay in force for the rest of your lifetime. You have to consistently monitor it and review it to make sure that it is still on track and a healthy plan,” he says.