For a monthly fee, term life insurance offers a death benefit. There are no bells, frills or extra goodies. Are you considering something a little more substantial? Would you like to earn interest or invest in the stock market with your monthly life insurance fee? Do you see yourself building stockpiles of cash?
Don't look at a whole life policy as a means to make money quickly
Then a whole life policy, variable policy or universal policy might be for you.
What these policies are
The above-mentioned policies are known as "cash-value" policies. With these, in addition to the death benefit you receive with your life insurance policy, you also invest your premium payment in the hopes of receiving some type of return. Often, the premiums associated with these policies never change for the entire time you own them, which can be reassuring. Here are the different types of investment insurance policies:
Perhaps the safest of the "cash-value" policies, whole life gives you what is called "permanent protection." These policies are intended to be actively owned by you for the long term, your whole life. The premium payments remain stable and level throughout the life of the policy, and upon your death, your beneficiaries receive the death benefit in whatever amount you originally set up the policy. It is different from term life in that it also builds "cash-value" as the years pass. Eventually, if you hold onto this policy long enough, the cash value will be the same as the death benefit. It must be noted, however, that it takes many years for this to happen, so don't look at a whole life policy as a means to make money quickly.
The insurance company with whom you take out the policy retains ownership of the cash value in the policy, however, you generally can take out a low-interest loan on the cash value of your policy. If you don't pay it back, your beneficiaries will receive a reduced death benefit as the insurance company will take what is owed to them out of the death benefit.
There are two types of whole life policies, participating and non-participating. When you purchase participating whole life, you will pay higher premiums but you will also receive dividends. Non-participating costs less and offers no dividends.
It isn't wise to look at the cash value of your long term whole life policy as a savings account you can freely draw from. The only way to receive the cash-value of the policy is to cancel it, meaning that you'll no longer have a life insurance policy. If you're older when you do this, it could be very difficult to afford another one.
Variable life insurance
Variable life insurance is not designed for the faint-hearted. When you purchase this policy, you are taking a big risk. You are hoping that the insurance company will be successful in investing your premiums and that you will make money. There is no guarantee with these policies, however, you could lose every dime you invest and end up with a zero balance.
The insurance company you decide on will present you with several choices. You pick from a list of investment options, stocks, bonds, combinations of the two, or other accounts. You will make money or lose it depending on how well the company invests your premiums. It cannot be made clear enough that there is no guarantee of what you will earn or lose. Some policies, however, do lessen this risk by offering a guarantee that your death benefit will never fall below a certain agreed-upon amount.
The upside to variable life insurance is that it can perform well. If it does, your beneficiaries will receive a higher death benefit and the policy will have a higher cash value.
As with whole life, you can take out loans against the cash value of your policy, but again, they must be paid back with interest. If they aren't, your beneficiaries will receive a reduced death benefit because the insurance company will pay themselves back before giving whatever is left to your beneficiaries.
If you want, you can cancel, or surrender (in insurance terms), your variable life policy and get the cash value, or you can convert it into other types of policies, like annuities. If you cancel your policy too soon, however, the only thing you are guaranteed is that you will lose money.
These policies are risky. Because of the risk, laws have been passed that with your variable policy must come a "prospectus" or policy illustration. These cumbersome documents describe your costs, expenses and investment options. Here you will find your premiums, death benefits, possible cash value and possible dividends and credits. Generally, the illustration is divided into two sections headed "Guaranteed" and "Projected." The guaranteed section will describe to you what guarantees the company is offering. A guaranteed death benefit amount, for instance, might be offered, no matter how your investments perform. You will probably also find, in this document, the penalties for early cancellation, which could be charged to you if you cancel the policy without holding it for a certain amount of time.
A knowledgeable insurance agent who can go over this prospectus with you, page by page, is invaluable. It might be wise to ask your insurance specialist and yourself questions along these lines:
- How much money will I receive if I cancel my policy? How long do I have to wait before cash value builds up?
- Can I afford these premiums?
- Can I afford to lose everything I invest?
- What is the insurance agent's commission on the sale of this variable policy as compared to a term life policy?
- What interest rate is the company using in their examples?
If you are familiar with and comfortable with investment risk, then variable life insurance may be for you.
Universal life insurance
Universal life allows you more flexibility with your policy than term insurance does. Once you make an initial payment, you can increase or even reduce the total death benefit amount. You can make premium payments on your own schedule and you choose the amount you pay, as long as it meets the required minimum. With some polices, there is a maximum you cannot exceed, so you should understand the details of this type of policy before you sign up.
If you decide to increase your death benefit with a universal life policy, you will probably have to submit to a medical exam, or give the insurance company proof that you are healthy.
It's important to keep a close eye on this type of policy. You don't want to lose track of how much you've paid in and what the current charges are.
The advantages to cash-value policies
- You can take out low-interest loans against the cash value in your policy.
- You can convert your cash-value policy into another type of account, such as an annuity, or surrender your policy altogether for the cash value.
- The premium payments are usually fixed, while they can be flexible if you prefer, as in a universal life policy.
- Such policies are long-term investments, guaranteed for life as long as the premiums are paid.
- If they perform well, you can make more money than you contributed, and there are sometimes tax advantages.
- The premium payments are higher with investment-type insurance policies than with term insurance policies.
- Because the premiums are higher, some people under insure themselves to save money.
- If you surrender or cancel your policy in the early years, you will lose money. The cash-value takes years to build up.
- These types of policies are not insured by any federal agency like bank accounts are.
- Conceivably, if the markets your insurance company invests in go south, you could lose every dime and your policy could fall to a zero balance unless you have some sort of guarantee in place.
Investing in insurance
While it may not be the best way to invest your money, it is appealing to some people. Take the time to learn about it so that you can make an educated decision yourself. You will want to research and get a couple of quotes from a reliable insurance agent. We suggest going to www.insureme.com
for a fast quote with a personal touch.