Whole vs. Universal vs. Variable Life

Most people at this stage have a general understanding of a permanent life insurance policy. What you may not know are the cause and effects of the different types of permanent life policies. As you continue reading, we’ll explain the difference between Whole Life, Universal Life, Variable Life, Variable Universal Life, Single-Premium Life and Survivorship Life Insurance. Whew! Exciting stuff eh? Let’s start at the beginning.

Whole Life Insurance

Whole life, also referred to as “straight life insurance,” provides a set dollar amount of coverage, and a fixed premium that can never be canceled or exchanged for other premiums. Because these payments stay the same throughout your life, the premiums are higher compared to your ‘statistical risk of death’ in the early years of the policy. This is why the reserves are built up. Assuming you live a long time after the policy was issued, your payments become lower based on your risk of death. Simply Put: During the first few years of a whole life policy, insurance companies take in substantially more money than they pay out!

Some of this surplus goes to the agent’s commission and some of it becomes your cash reserve, which the company puts in fixed-income investments. Then after several years, you’ll be able to borrow against the reserve, or cancel the policy and receive it’s cash surrender value.

Hint: This option is generally undesirable for younger people with small children who can’t afford the high premiums during the early years of the policy.

Universal Life Insurance

Universal Life combines some of the desirable features of both term and whole life insurance and offers some additional perks. For example, over time, the net cost of a Universal policy is lower than whole life insurance. You can also build up a cash reserve, as with whole life, and vary the premiums payments, coverage amount or both, from year to year. In contrast, whole life requires one set payment amount, which cannot be varied.

Another advantage to a Universal policy is that it normally provides you with more consumer information. Get details such as the amount of premiums going toward company overhead expenses, reserves and policy proceed payments. You can also find out how much is retained for your savings.

Variable Life Insurance

A Variable policy is where the cash reserves are invested in securities, stocks and bonds. In this case, policies combine insurance features with mutual funds. Therefore, your investment return is tied to the financial markets’ performance. In today’s economic times, this may seem like an absurd option, but talk to a qualified agent to learn more. You may be surprised at what this option can do for you!

Variable Universal Life

In this option, your policy is similar to that of a Whole Life policy, but combines the premium payment and coverage flexibility of Universal coverage with the investment opportunity (and risk) of Variable life insurance.

Single-Premium Life Insurance

A Single-Premium policy is just like it sounds. You pay, up-front, all the premiums due for the full duration of the policy. Typically, any policy with a savings feature can be purchased with a single premium. As you can imagine, this obviously requires a huge lump sum of cash — usually $5,000, $10,000 or much more depending on your age and the dollar amount of the policy.

You’re probably wondering: Who does something like this? Well, one reason to commit to such a policy is that it enables you to give the fully-paid-for policy to new owners, which can result in major estate tax savings.

Survivorship Life Insurance

This is also called “second to die,” or “joint” insurance, the latter sounding a little nicer… don’t ya think? It’s relatively new in to the insurance word. It provides a single policy that insures two lives, usually spouses. When the first spouse dies, no proceeds are paid. Instead the policy pays off only upon the death of the second spouse. Why does this work?
Estate Planning: Those wealthier couples who expect substantial estate taxes will be assessed on the death of the second spouse may use this policy as part of estate planning. It’s usually not needed for small to moderate sized estates.
Family Business or Real Estate Interests: A Survivorship policy may be desirable when a major family asset, or family business is on the line. These are assets that aren’t liquid and that the survivors may not want to sell.
Health Issues: Having poor health often times makes alternative insurance options nearly impossible to get or come with a much higher cost. Here, because two lives are insured, premiums for Survivorship policies are relatively low compared to policies on just one person’s life. Therefore, if the other spouse is in reasonably good health, the couple can usually obtain Survivorship Life insurance.

Keep in mind that this is just a broad overview of some different policies available. As always, you should consult with a licensed insurance agent to discuss the best options for your individual situation.