There are several different types of life insurance. First you can break down life insurance to whole life, endowment policies and term insurance. Whole life insurance costs more initially but it’s designed to have a lower premium in the later years. This type of insurance has cash value and provides coverage for your entire life.
Endowment policies are similar to whole life insurance except they have an expiration date. An endowment to age 65 ends at that age. You don’t lose anything, however, since the company writes a check for the face value of the policy. These types of policies are no longer popular and seldom sold. They are the most expensive type of insurance.
The third type of life insurance is term insurance. Term insurance also ends at a specified time but you don’t get anything back in most cases. However, it provides only insurance protection and is far more inexpensive than whole life insurance. The premium normally is quite low the younger you are but as you age, you’ll watch the premium increase along with the gray hairs in your head. By the age of 65, the price of the term insurance is to high for the average person to pay.
Within the category of whole life insurance you have a number of hybrid policies. The traditional whole life policy had a guaranteed cash value. Some of the older policies that were either participating or from mutual companies, also offered dividends if the company made more money than expected. You could borrow the money from the policy if you needed cash and all it took was signing a form. In exchange, you paid an interest rate on the money that was slightly more than the growth of the cash value, less any additions. Ultimately, the interest rate was less than a percent.
The loans on whole life insurance are nothing like loans to from a lending institution. They are more like loans from a 401-k. You don’t have to pay them back as long as there’s enough money in the policy to support the interest. When you die, if you don’t pay back the loans, the insurance company subtracts any loans from your policy before they give the beneficiaries the proceeds.
While the traditional whole life policy offers a guarantee and in many cases a dividend, there’s no risk assumed by the policyholder. These policies are variable and universal life insurance policies. The variable life policies are most frequently universal life policies also; they can be traditional life contracts that offer the variable options. These are sub accounts similar to mutual funds. The owner of the policy chooses the sub-accounts and the percentage of funds to invest into those accounts. Each month, the company sells a proportionate amount of the account to pay for the cost of the term insurance on the interior. The funds all grow tax-deferred.
The universal life based on interest works similar to the variable universal except the company credits the account with the prevalent interest rate. In both types of universal policies, if the policy doesn’t perform at specified level, the policyholder will find there’s not enough money to keep it going when the insurance premiums on the interior become too high. When this happens, the holder of the policy either forfeits the policy or increases the payment.