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A straight life insurance policy offers coverage that lasts a lifetime, with premiums that stay the same over the life of the policy. Straight life insurance is more commonly known as whole life insurance. While more expensive than term life insurance, straight life insurance offers the opportunity to build cash value — similar to a savings account — that you can borrow against or take out as a loan.
What is a straight life insurance policy?
Straight life insurance has level premiums you pay until death or until the policy is considered paid in full. Once you pass, the death benefit amount is then paid to your chosen beneficiary or beneficiaries. This differs from term life insurance, which has level premiums and a level death benefit, but only lasts for a certain length of time, usually between 10 and 30 years.
A straight life insurance policy can also build cash value over time. Every time you pay your premium, a portion goes towards maintaining your life insurance policy and the rest goes to the cash value account. Straight life has guaranteed minimum growth potential in the cash value account, which can be used for different reasons. You can use the cash value as a loan and borrow up to the amount in the cash value account. If you no longer need the straight life insurance, you could also surrender the policy to the life insurance company and receive the cash value upon cancellation. Keep in mind that fees for surrendering the policy may be charged, ultimately reducing the total cash value amount available to you.
Pros and cons of a straight life policy
Straight life insurance can be used as a financial planning tool. It is meant for long-term goals and not short-term needs. If you have a short-term life insurance need, term life insurance is usually a better choice. To find out if a straight life policy is right for you, consider the pros and cons of this type of life insurance.
|Fixed premiums||More expensive than term life insurance|
|Guaranteed cash value growth||Cash value growth is slow|
|Level death benefit||Not ideal for short term goals|
|Can take a loan or surrender policy for cash value||Cash value not paid back can reduce the death benefit paid to the beneficiary|
Difference between straight life insurance and other types of life insurance
Straight life insurance is just one type of life insurance you can consider to meet your needs. However, there are multiple options to consider when going through the process of selecting and buying a life insurance policy.
Straight life policy vs. term life policy
While straight life insurance offers lifelong coverage, term life insurance provides temporary life insurance coverage. Most term life insurance policies offer a level death benefit and premiums for 10 to 30 years, though some companies offer coverage for five years and as much as 40 years. Straight life provides a level death benefit and premiums for as long as the insured person lives and premiums are paid on time.
Term life insurance does not offer a cash value component like whole life insurance does. Since it only provides life insurance upon death of the insured, term life insurance is typically cheaper than straight life insurance. If you have a temporary need for life insurance, like covering a 30-year mortgage, term life insurance might be the more cost effective choice. But, if you have a lifelong need, like paying for your funeral costs when you die, straight life insurance might make more sense. If you have both temporary and long term life insurance needs, consider buying more than one life insurance policy to meet all your financial obligations. This is often the best strategy for people with various financial goals that are not all lifelong.
Straight life policy vs. universal life policy
Straight life insurance and universal life are both types of permanent life insurance. The biggest difference between the two types of life insurance is that universal life insurance offers more flexibility than a straight life insurance policy. With universal life insurance, you can decrease or increase your death benefit amount. If you increase the death benefit, you will have to pay for the higher amount based on your current age and may have to complete a medical exam. You can also adjust your premiums up or down, though if you decrease premiums, you have to pay enough to avoid lapsing the policy.
Universal life insurance also comes in different forms, including guaranteed and indexed. Guaranteed universal life insurance guarantees the death benefit until you’ve reached a certain age, as long as minimum premiums are paid. Indexed universal life insurance can help cash value grow faster since it is tied to stock index returns. Variable indexed universal life insurance allows for money market diversification, which can create less of a risk than indexed universal life. However, these types of universal life insurance require monitoring to ensure the policy does not lapse and your premiums cover the cost of the life insurance death benefit. If you are interested in a variable life policy, speaking with a qualified investment professional could help you understand your options.
How are straight life policies taxed?
Straight life and other forms of permanent life insurance are used as part of financial planning because of the tax advantages they provide. The death benefit is paid to the beneficiary once the insured person dies and is income tax-free. Cash value loans and withdrawals are also tax-free, just like taking out a car loan or withdrawing money from a savings account. Keep in mind that when cash value is removed from the policy and not paid back, it will reduce the death benefit amount your beneficiary receives.
No matter how much cash value a straight life policy holds, the amount continues to grow tax-deferred. However, if you withdraw more cash value than has been paid in premiums, the withdrawals can be considered taxable income. You also may have to pay interest on the money borrowed or withdrawn from the cash value account. If you receive dividends on your straight life policy, they only become taxable when the amount of dividends received is higher than the premiums paid into the life insurance policy. If the dividends accumulate interest, the interest amount is considered taxable income, just like other accounts that accrue interest.