Whole Life Insurance & Universal Life Insurance

What is permanent life insurance?

Permanent life insurance is often called whole life insurance because it provides lifetime coverage – with the added benefit of accumulating cash value over time. Permanent insurance costs are usually guaranteed when you first buy the policy. Some permanent insurance plans enable you to pay for a limited number of years and then never again. Universal life and participating life are other forms of permanent life insurance that you may want to consider.

Whole Life Insurance

Whole life insurance (or permanent life insurance) is a policy set up where a set benefit is to be paid out on the death of the insured and does not expire (as long as all required payments are made). The cost to the insured individual is often monthly or annual payments established at the onset of the policy that will not be changed over its life. The value of the policy is often a lump sum payment that is paid out on death or when the insured individual reaches the age of 100.

One benefit of whole life insurance is that it can be a good ‘forced’ saving measure for individuals when planning for their spouse or dependents. The cost of these policies can be high so they do tend to be utilized more by individuals with high income already. The biggest benefit of the plan is that the cost, while high, does not increase over time like term life insurance does. Once the terms are established the cost will remain the same. Most insurance companies offer a discount for setting up as annual payment plan vs paying on a monthly bases.

Universal Life

Universal life is similar in some ways to, and was developed from, whole life insurance, although the actual cost of insurance inside the UL policy is based on annually renewable term life insurance. The advantage of the universal life policy is its premium flexibility and adjustable death benefits. The death benefit can be increased (subject to insurability), or decreased at the policy owner’s request with all life insurance policies.

The premiums are flexible, from a minimum amount specified in the policy, to the maximum amount allowed by the contract. The primary difference is that the universal life policy shifts some of the risk for maintaining the death benefit to the policy owner. In a whole life policy, as long as every premium payment is made, the death benefit is guaranteed to the maturity date in the policy. A UL policy lapses when the cash value is no longer sufficient to cover the insurance and policy administrative expense.

How Life insurance premiums are calculated

An insurance premium is generally expressed as premium per $1,000 of sum insured and is illustrated in the form of tables of premium rates by insurance companies. Premium varies across insurance companies, plans, policy terms, sum assured, the age and the health of the proposed insured. Premium payment depends on the type of policy chosen and also on the payment options that the policy offers.

Universal life and Whole life both have a limited pay options available. Universal life gives the control of the investment to the policy holder. Yourinvestment are tax sheltered and grow tax free inside your policy and can be used to pay the premiums for as long as you wish. The Whole life is where the insurance company manages the funds and may come with guarantees. Limited pay means you have the options to choose on how long you wish to pay the premiums and the coverage will continue for the rest of your life. Selecting a shorter premium period on a limited pay usually means the monthly / annual premiums will be higher than if you select a longer time option. The insurance companies calculate the premiums you would pay to age 100 and take the total cost and convert it to present dollar value based on having your money invested in their company. That number is then changed to the limited time period you may choose between10 years–age 65.