Different Types of Life Insurance
Universal Life Insurance
Universal is a variation of whole life insurance. It is a blend of term insurance and a savings account. It earns interest at a money market rate, the policy holder paying an annual fee for coverage, which includes a fee for managing the policy. Funds not used for paying the insurance earn a tax deferred interest.
With a universal life insurance policy, the premium can fluctuate. The policy holder decides how much to devote toward insurance and how much toward savings. The face amount of the policy can be changed as well as the amount of premium payments and how often they are paid. However, the insured must make certain their savings are large enough to cover the monthly premiums for the insurance as well as the policy expenses. If the savings are not sufficient enough, the monthly charges will consume the cash value and the policy will be of no value.
Universal insurance offers two options. The first option is keeping the death benefits the same from year to year if the policy holder does not request any changes. The second option is having the death benefit at any time stay equal to the original face value in addition to the policy's cash worth.
This type of policy can often give an elevated interest rate when inflation rises, even if the insuring company guarantees a low rate. Because of this risk, premiums are lower for whole life insurance but pricier for term insurance for younger individuals. In addition, when the price for managing the policy is added to the premium, the policy holder will receive a lower return on their investment. It is crucial to keep in mind that changes in interest rates will affect both a policy holder's yields and premiums.
Variable Life Insurance
Variable life insurance is a type of permanent life insurance that allows the holder to target their premium to one or more detached investment funds. These funds can be fixed income investments, stocks, bonds, or money market funds. Depending on the company policy, the holder can change their investments from two to five times annually. Unlike universal life insurance, with variable insurance the insured can manage the investment of their cash value.
The policy, however, can be risky because the investment has the ability to rise or fall. The cash value and investment will differ, depending on what the investment fund does. The death benefit cannot fall below the total amount of life insurance primarily purchased. As with traditional whole insurance, the policy holder pays fixed premiums and can borrow against the policy at either fixed or variable rates.
Because an individual decides where to invest their money and put themselves at risk, variable life insurance should be considered. Insurers must, by law, offer variable insurance by prospectus. A prospectus is a document that gives the prospective policy holder important facts concerning the company and the policy. Variable insurance can often cost more than other varieties of cash value life insurance. According to current laws the cash value of variable insurance, unlike term life insurance, cannot be taxed until the policy holder cashes in their policy.
Universal Variable Life Insurance
Universal variable insurance is also commonly referred to as flexible premium variable insurance. This kind of policy combines the flexible features found in universal life insurance policies and the investment alternatives of variable insurance. As with universal insurance, the policy holder can choose to raise or lower their premiums in a single policy. As with variable insurance, individuals have the right to decide how their cash worth will be invested.
The insurance company does not have to make any kind of guarantee on the policy holder's cash value. With universal variable insurance, the value of the cash fund is in direct relation to the market worth of the assets in the cash worth fund. Therefore, a policy holder could have $15,000 in net cash worth one day and $10,000 on the following day, dependent on market fluctuation. Thus, one of the central problems with universal variable insurance is that the policy holder can lose their insurance coverage.
Adjustable Life Insurance
Adjustable insurance is another variety of permanent protection that allows the policy holder to change the amount of their premiums. They can also increase or decrease the face amount of the policy, or lessen the protection period. If the policy holder increases the death benefit, they must prove that they are still in fact insurable.