Whole Life or Ordinary Life
Similar to annual renewable term and convertible term, whole life policies stretch out the cost of insurance over a longer period of time. With whole life policies; however, the costs are spread out over your entire life. Once your premiums are paid up, the excess dollars are invested by the company. In essence the insurance company is managing the investment of your excess premiums, and that’s why your choice of company is so important. With this type of policy; however, the inflexibility of premium payments could become a burden if your expenses increase or if you lose your job.
This option offers greater flexibility than whole or term life. After your initial payment, you have the option of reducing or increasing the amount of your death benefit. If you choose to increase your benefit, you may have to provide medical proof that your health has not deteriorated. Also, after your initial payment, you can pay premiums any time and in any amount, as long as you don’t miss a payment. In some cases, there are limits to how much extra you can pay in advance premiums. You will need to manage these policies to maintain sufficient funding, especially because the insurance company can increase charges.
As the name suggests, Variable Life policies offer fluctuating benefits. That’s because the insurance company invests your premiums. The insurance company offers you a choice of funds, in which your money will be invested. The amount of money your beneficiaries will receive and the cash value of your policy depend on how well the insurance company invests your money. There are both Universal and Whole Life versions of Variable Life.
In most variable and some universal life insurance policies, if your investments perform well, you’ll have a higher cash value and death benefit (some universal and variable universal policies also allow you to add your cash value into your death benefit). If the investments lose money, you’ll have a lower cash value and death benefit.
Some policies will guarantee a minimum death benefit. You can also take loans against the cash value of your policy, but if you don’t pay them back with interest, your beneficiaries will receive a reduced death benefit. You can also surrender your policy for cash or convert it into an annuity, but keep in mind that cashing in a permanent policy after only a couple of years is an expensive way to get insurance protection for a short time. Look closely at the investment options insurance companies offer for Variable Life policies. Make sure they are well-balanced, and give you an opportunity to invest at your own risk tolerance.