Whole Life Versus Other Permanent Life Insurance Products

Purchasing permanent life insurance coverage is a big step for many. While permanent life insurance may not be as affordable as term life insurance, it offers the advantage of covering you for the entirety of your life, as long as premiums are paid on time.

Permanent Life Insurance vs. Term Life Insurance

Simplifying the comparison between permanent and term life insurance: term life insurance provides a death benefit if you pass away, and permanent life insurance provides a death benefit when you pass away. What is important to remember is that both types of insurance have their uses. You can read more in depth about the differences between term and permanent life insurance here.

Term life insurance is a great way to protect loved ones during a limited period of time where an unexpected death would impair a family’s ability to continue with school, pay the mortgage, pay for childcare, and more. The period of time is key. For example, after all children have grown up and finished school, and the mortgage is paid, a term policy may have served its purpose outside of burial and funerary costs.

Term life insurance can be particularly useful for active duty military servicemembers who want to protect their loved ones during their years of service with coverage in addition to Servicemembers’ Group Life Insurance (SGLI).

While permanent life insurance can be used to pay for all of the same things, the death benefit will be paid to your beneficiaries regardless of any time period, as long as premiums are paid. This is advantageous for those who:

• want to ensure that a death benefit is paid regardless of the age of the insured
• have a lifelong dependent
• want to ensure a spouse is financially taken care of after the insured passes away
• want to leave a legacy

The Advantage of Permanent Life Insurance

An important feature of permanent life insurance is its cash value which accumulates on a tax-deferred basis. Term life insurance policies do not usually offer this feature. Because of this, permanent life insurance offers a few options that term policies likely will not. For instance, a portion of a permanent life insurance policy’s cash value may be borrowed as a loan, depending on the terms of the policy. Keep in mind, borrowing could decrease the death benefit if not repaid.

It’s important to note that a policy’s cash value is different from the face amount, at least until the policy is fully paid. The face amount is the amount of death benefit provided at the time of the insured’s passing away or at policy maturity.

Common Types of Permanent Life Insurance

While the various types of permanent life insurance products have cash value, how that value accumulates varies. There are other perks of each type of product as well.

Whole Life

Whole life (sometimes called “ordinary life”) is considered the predictable option of the permanent life insurance types. It provides a guaranteed amount of the death benefit and rate of return on the policy’s cash value. The insurance company usually handles the investment of policy premiums. Your role in the policy is to ensure that premiums are paid on time.

Many whole life products provide the opportunity to earn non-guaranteed dividends based on the accumulation of cash value in the policy. These are some of the ways the dividends can be used by the policy owner.

• Offset premium payments
• Repay policy loans and/or accrued interest
• Purchase Paid-Up Additions to increase the policy’s total death benefit and cash value; the cash value of these additions are then eligible for potential future dividends as well

Another staple of whole life insurance is that premiums are usually level, meaning they won’t increase over time. When a policy is purchased, premiums are locked in based on the age and health of the insured for the entire funding duration elected. This means as price inflation impacts purchasing power in other aspects of your future financial life, whole life premiums remain stable as of the date they were set.

Universal Life

Universal life policies offer a distinctive premium payment system. After the initial premium payment is made, the policy owner has the option of increasing or decreasing the scheduled premium amount and sometimes even the death benefit amount to better fit their evolving financial situations. Sometimes even the frequency of premium payments is adjustable. There are certain minimums and maximums to keep in mind, often dealing with the policy’s cash value.

While the policy’s cash value rate of return may be guaranteed, there is a possibility that coverage may lapse if interest rates fall below projections, administrative costs rise, or other changes in the policy value take place. Some universal life policies offer secondary guarantees or no-lapse guarantees to prevent a policy from lapsing under various predetermined circumstances.

Indexed Universal Life

An indexed universal life insurance product could be an option for those wanting control over the amount and length of premium payments over time; these products offer more flexibility than a whole life product would provide. The owner of an indexed universal life product selects which financial index (S&P 500, Nasdaq, Russel 2000, etc.) will be used to determine how interest is credited to the contract, typically on a “point to point” policy anniversary basis. Interest credits usually have a cap (maximum) per contract year in exchange for a minimum contractual guarantee in years of poor index performance.

These products can become underfunded and lapse, so it is very important for the owner to understand contractual guarantees and consider how future premium increases will be paid if assumed index performance did not occur as hoped. The rate of cash value accumulation depends on the performance of your chosen financial index, so your policy’s cash value could be increased or reduced compared to what you would be guaranteed to receive from a whole life product.

Variable Universal Life

Variable universal life products offer control on both fronts with adjustable premium payments and investment options in accounts that are separate from the insurers general account. Investment choices are typically quite extensive, but the owner bears full risk of market performance over time. Cost of insurance charges increase as the insured ages and may impair long-term performance of the subaccounts selected. Cash value can normally be used to pay a premium payment if the need arises, which reduces risk of coverage lapse, but can also reduce the long-term value of the policy.

Variable universal life products also offer the owner the option of a level or increasing death benefit amount. As with indexed universal life, variable universal life involves risks based on the performance of non-guaranteed investments to support the contract until settlement of the death benefit, creating a level of risk and reward that may not meet an insured’s long-term needs.

Which is right for you?

There are many factors that could influence which permanent life insurance product option works best for you and your needs. Do you have a set-it-and-forget-it mentality when it comes to life insurance? A whole life product might work best for you. Are you not afraid of risk and want to enjoy the flexibility of premium payment adjustments? Perhaps a variable universal life product is what you are looking for. It is advisable to speak with a life insurance representative to help paint a bigger picture of where a specific policy fits in with your family’s life insurance needs and long-term financial goals.