The Many Types of Whole Life Insurance

Read this if you're having a hard time making heads or tails of all the different kinds of whole life, permanent, or cash-value life insurance products that are on the market today.

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Whole life insurance—or permanent or cash-value life insurance, if you're better acquainted with either of those terms—often is referred to as one part insurance product and one part investment vehicle.

Which makes sense, as the two most common reasons people tend to hand over their hard-earned cash for this form of insurance are so they can be covered for the rest of their lives--and so they can leave an inheritance to their survivors after they pass away--and so they can be forced to sock away some amount of money on a regular basis.

That's not to suggest that these are the only elements of whole life insurance that attract people.  Here are a few more: when it comes to most forms of this product, premium payments remain fixed for as long as the policy remains "in force." Also, a policy can't be canceled as long as a person continues to pay his or her premiums on time.

Traditional vs. Interest-Sensitive

That's just a bare bones look at what whole life, permanent, and cash-value insurance tends to offer, though. Beyond those basic elements, the many different variations and permutations of the product cover quite a lot of ground in terms of when and how premiums are paid, how premiums are used, and more.

Those many variations all are part of two categories, by the way: traditional and interest-sensitive. And beyond that, each of those categories generally is available in either fixed-dollar or variable form.

To keep things as easy to understand as possible, let's begin by looking at the different forms of traditional whole life insurance before defining what interest-sensitive, fixed-dollar, and variable mean.

The Six Types of Traditional Whole Life

1. Non-Participating

You probably could say that this type of traditional whole life insurance is the most straightforward. Another you could use to describe it would be inflexible. They're good words to use here because pretty much all of the components that make up these policies—the premium payments, the cash surrender values, and the death benefits—are set when they're issued, and they can't be changed after that.

That may sound like a bummer, and in some ways or situations it probably is, but there are some positives too. For instance, some people like that the costs associated with non-participating plans are fixed. Plus, the out-of-pocket premium payments tend to be low.

2. Participating

This type of traditional whole life insurance is a lot like the non-participating type described above in that the cash value, death benefits, and premium payments tied to its policies are set at the time of issue and usually remain stable for the remainder of the policyholder's life.

The big difference here is that participating plans pay out dividends in certain situations. Not only that, but these dividends can be paid out in a number of ways. One of them is in cash, but other options include using them to reduce the cost of future premium payments or using them to buy additional amounts of paid-up whole life insurance or even one-year term insurance.

Participating whole life insurance doesn't trump its non-participating counterpart in every area, though—with one example being that, in general, the premiums attached to participating policies are higher than those associated with non-participating ones.

3. Indeterminate Premium

Indeterminate premium policies also are quite similar to non-participating ones. Specifically, their cash values and death benefits are set at issue and then can't be changed for the remainder of the life of the policy. What sets indeterminate premium policies apart from the types mentioned earlier is that the premium payments are adjustable—by the insurer, not by the policyholder.

As for what prompts these adjustments: the premium that's determined at the beginning of a policy's life is tied to estimates the insurance company makes about its investment earnings, expense costs, and other factors. If those estimates change, the company can and will adjust premiums in such a way that they take into consideration the new climate.

One good piece of news associated with this aspect of this form of traditional whole life insurance: the adjusted premiums will never go above the "maximum guaranteed premium" that's laid out in each policy.

4. Economic or Economatic

If ever you've wanted to purchase a form of life insurance that combines elements of the (participating) whole life and term life varieties, an economic—also sometimes called economatic—policy may be the one for you.

Economic whole life insurance blends these two types of products by taking the dividends that come along with participating plans and using them to purchase supplemental coverage that, in most cases, consists of some amount of term insurance. The benefit of all of this is that it usually results in a higher death benefit, although that is not guaranteed.

5. Limited Payment

Also sometimes referred to as "limited pay," this kind of traditional whole life insurance—which can be of the participating or non-participating variety—allows policyholders to gain access to a lifetime of coverage while paying premiums for a specific number of years (rather than throughout the life of the policy).

The premium payments associated with this type of policy are higher than those that are tied to other whole life products, but the benefit is that they're "paid up" at a much earlier age (such as 65, 70 or 80).

6. Single Premium

The easiest way to understand what this form of traditional whole life insurance brings to the table is to take everything that was written about limited payment plans in the bullet point above and substitute a single, substantial, up-front payment for the part that deals with paying premiums for a specific number of years.

Although you don't have to make any premium payments after the first one when it comes to "single premium" policies, you may have to pay certain, often substantial fees should you decide to "cash in" during the first few years they're in force.

The Four Types of Interest-Sensitive Whole Life

Unlike the varieties of traditional whole life insurance detailed so far, the four varieties of interest-sensitive whole life insurance don't guarantee the benefits related to them for the life of the policy in question.

Instead, for interest-sensitive policies, insurance companies make use of the investment earnings that are related to these products so they can better reflect current interest-rate conditions and fluctuations.

Why is this a good thing for people who decide to purchase some amount of interest-sensitive insurance? The main reason is that interest-rate gains are more quickly reflected in these sorts of policies than they are in their traditional whole life insurance counterparts.

The flip side of that, of course, is that interest-rate dips also are reflected more quickly in these kinds of policies than they are in the policies mentioned earlier.

1. Universal

Universal life insurance often is considered the most flexible of all of the whole life varieties that are available. That's because it separates the components that traditionally are combined to create a traditional whole life policy—cash value, death benefit, and premium payment—and deals with them individually.

The gist of what that means for you, the potential policyholder, is that you're able to alter (to an extent, of course) things like how much your premium payments are and when you pay those premiums. Also, you can alter the amount of coverage your policy provides.

One word of warning often shared in relation to universal life insurance is that dealing with staying on top of all of the above can be a challenge. For instance, if you reduce how much you pay for your premiums too drastically, or if you fail to pay them regularly enough, a number of negative things could happen to your policy, such as its cash value could diminish or it could lapse entirely.

2. Current Assumption

Here's another type of interest-sensitive whole life insurance that has some commonalities with the category's universal product.

In the case of current assumption life insurance, though, the provider (your insurance company) decides how much or little you should pay when it comes to your policy's premiums. Also, it may raise or lower those premiums over time, depending on its estimates related to future investment earnings, expenses and the like.

Other than that, though, you're free to borrow against the accumulated cash value of current assumption policies just as you are with traditional whole life policies. Also, the death benefit that's attached to these policies remains stable as long as they are in force.

3. Excess Interest

This form of interest-sensitive whole life insurance is pretty similar to the universal variety detailed earlier, with one significant difference: the premium payments associated with it are fixed. In other words, you're required to make regular premium payments just like you would if you took out one of the traditional whole life policies mentioned earlier.

As for where the "excess interest" that gives this insurance product its name comes into play: it has to do with the fact that any additional (or excess) interest that's related to these policies is used to bolster their cash values.

4. Single Premium

Like the single premium product discussed in the section about traditional whole life insurance above, the key aspect of the single premium version of interest-sensitive whole life insurance is that possible policyholders make just one payment to obtain it.

Or they do as long as the interest rates related to their policies don't drop, as in such cases they may have to hand over additional premium payments.

Aside from that, the initial interest rate that's attached to this type of single premium policy is fixed for a limited time (most often between one and five years).

Fixed-Dollar vs. Variable Options

Many of the policy types touched on in this article can be bought in one of two ways: they can be bought on a fixed-dollar basis--which refers to the premium payments, cash values, and more in dollar amounts—or they can be bought on a variable basis.

For variable policies, the cash value is referred to in units that can rise or fall in value depending on where your premiums are invested—with bonds, money markets, mutual funds, and stocks being some of the options that are available to you--and how those investments pan out.

A number of risks come along with taking the variable-basis path, as you probably can imagine. A case in point: if the investments tied to your policy don't do well, you could be required to hand over higher-than-usual payments in order to keep it from being terminated.

In addition, the many fees and charges—such as ones related to surrender, mortality, expenses, and asset-management--that tend to go hand in hand with variable policies can put a real damper on the tax advantages that also are associated with them.

If you're engaged, a newlywed, or have been married for some time but don't have a life insurance policy, compare rates on life insurance from top companies now to find an affordable plan that protects you and your spouse.

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