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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 typically 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, also known as whole 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 you can use as a loan and borrow up to the amount in the cash value account.
If you no longer need the life insurance, you could also surrender the policy to the life insurance company and receive the cash value upon cancellation. Remember that there may be fees associated with surrendering the policy, 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 usually 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 could be right for you, consider the potential pros and cons of this type of life insurance:
|Fixed premiums||Typically 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 may reduce the death benefit paid to the beneficiary|
How does straight life differ from other insurance types?
Straight life insurance is just one type of life insurance you might 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 as little as 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 coverage for a set period of time, 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. However, if you have a lifelong need, like paying for your funeral costs when you die or supporting a child with a disability, straight life insurance might make more sense.
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.
How much does a straight life insurance policy cost?
A straight life insurance policy typically costs more than term coverage because the company is expecting to issue a death benefit at some point as long as you pay your premiums. The cash value component of straight life also typically increases the policy cost compared to term. Your personal rating factors will determine the cost of your individual straight life policy. These factors include:
- Level of coverage
- Health status
- Health history
Policyholders who are younger and healthy typically lock in lower premiums than ones who are older or have chronic medical issues. Although straight life insurance policies may be available without a medical exam, premiums are typically higher for these types of policies and death benefits are typically lower.
How are straight life policies taxed?
Straight life and other forms of permanent life insurance are used as part of financial planning partially because of the potential 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.
Frequently asked questions
According to Bankrate’s analysis, Mutual of Omaha, State Farm and Northwestern Mutual offer some of the cheapest life insurance for shoppers looking for straight life insurance policies. Although life insurance quotes are typically more similar across carriers than home or auto quotes, you may want to compare personalized quotes and look into factors other than price, such as customer service scores and financial strength ratings, to determine the best company for you.
Yes, straight life insurance is just another term for whole life insurance.
A straight life insurance policy is typically more expensive than a term life policy, but the cost of life insurance may vary significantly based on your coverage selections and personal rating factors. Being older, having chronic health conditions and having a risky job or hobby may all increase your life insurance premiums. Speaking with a licensed insurance agent may help you determine potential factors that may make a straight policy more expensive for you.