Whole Life Insurance and Variable Life Insurance: What Policy Is Best for You?

Written by admin on January 26, 2010 – 6:48 am

When comparing whole life and variable life insurance policies, it is useful to know what common features these life insurance policies share, how the policies differ from one another, and the unique advantages and disadvantages of each policy.

Permanent Insurance Policies

Whole life insurance and variable life insurance are permanent insurance policies. This means that as long as the policy remains in force, meaning all premiums are paid, both policies provide insurance protection for as long as the insured lives.

Whole Life Insurance

Whole life insurance has the following features:

Level Premiums. Premiums for whole life, which are based on the age and health of the insured, are set when the policy is issued, and should remain the same for the life of the policy
Fixed Death Benefit. The death benefit or face value, which is the amount paid to the beneficiary when the insured passes away, remains constant (unless loans are taken against cash value)
Cash Value. In addition to permanent insurance coverage, a whole life policy includes a savings element. A whole life policy builds cash value, based on the difference between the premiums you pay and the cost of your insurance. The cash value earns tax-deferred interest that can be withdrawn or borrowed
Dividends. Whole life policies may also earn dividends, though dividends are not guaranteed. Dividends are funds that the insurance carrier returns to its policyholders if it has better than expected earnings. Dividends can be received as cash, used to buy additional insurance coverage, or can remain on deposit with the insurer and earn interest
Expenses. In addition to the cost of insuring you, administrative expenses are deducted from your premiums

Advantages Of A Whole Life Policy

Whole life insurance has several advantages:

A whole life policy remains in force as long as the premiums are paid
Premiums are set at issue, so you are not likely to see an increase in your rate
You can borrow against the tax-deferred cash value, usually at a low interest rate stipulated within your policy
The death benefit is fixed (as long as there aren’t any outstanding loans against the cash value)

Disadvantages Of A Whole Life Policy

Although whole life insurance has many advantages, this type of insurance policy also has a couple of drawbacks:

A whole life policy may be costly, particularly when compared to term insurance or a variable life insurance policy
The death benefit is fixed. If you should need more insurance at a later time, you may have to take out an additional policy

Variable Life Insurance

Variable policy is also permanent life insurance that builds cash value. The biggest difference between variable life insurance and whole life insurance, is that you get to invest the cash value in your choice of stock, bond, or money market portfolios. These sub- or separate accounts can vary in value based on market conditions.

Variable life insurance has several distinctive features:

Fluctuating Values. A variable life insurance policy has a minimum death benefit, but the actual death benefit and cash value may fluctuate. The fluctuation is based on the returns of the individual separate accounts. If the cash value of your policy drops too low, you may have to pay additional premiums to fund the minimum death benefit
Options A or B. Unlike whole life, variable policies have two death benefit options to choose from: Option A and Option B. Option A has a fixed death benefit, whereas Option B pays the death benefit plus the policy’s cash value. If the cash value increases you get more insurance. However, Option B requires higher premiums than Option A
A Prospectus Is Required. Because of the investment risk of separate accounts, federal securities law regulates theses policies. You must receive a prospectus, which you should read carefully. It explains the separate accounts and the various fees that might be deducted from your premium payments
Expenses. Fees are taken from your premium payments. These include charges to administer your policy and the cost of your insurance. The cost to insure your life varies each month, based on the amount of risk, which is the difference between the face value and the cash value of your policy. Other fees are charged to manage your investments in the separate accounts

Advantages Of A Variable Policy

Here are several advantageous aspects of variable life insurance policies:

You benefit from the increase in the separate accounts should the investments increase in value, which can reduce your cost of insurance
Your insurance coverage amount could be increased by selecting Option B
Money can be moved from one account to another at no cost
Any gain in the sub-accounts is tax-deferred, so you should not have to pay capital gains when you move money from one account to another

Disadvantages

Variable annuities also have a few drawbacks:

If the separate accounts decline and your cash value drops, you may have to pay extra premiums to keep your policy in force
There are fees for managing the separate accounts, including administrative expenses, as well as state and federal premium taxes
Surrender charges may apply should you wish to terminate the policy and take the cash value

Choosing Between Whole and Variable Life Insurance

When choosing between a whole life and a variable life policy, keep in mind your level of investment expertise and your death benefit needs. With a whole lie policy, your premium payments and the insurance coverage your beneficiaries receive are not likely to change.

Conversely, a variable policy places the investment risk on you. If the value of your separate accounts declines, your death benefit may decrease and your premium payments may increase. However, if the accounts increase in value, you and your beneficiaries have the potential to benefit.

To find out more information about how either a whole life insurance or variable life insurance policy can meet your needs, you can compare quotes from different life insurance companies in order to choose the best policy for you.

Source: Variable Life Insurance Policy • Investopedia • http://www.investopedia.com/terms/v/variablelifeinsurancepolicy.asp James H. Hunt, F.S.A. • Variable Life Insurance: Is It Worth It? • Feb 12, 2010 Intro To Insurance: Types Of Life Insurance • Investopedia • http://www.investopedia.com/university/insurance/insurance8.asp Insure.com • Variable life and variable annuity sub-accounts: The more the merrier? • http://www.insure.com/articles/lifeinsurance/sub-accounts.html Insure.com • Life Insurance Basics • Nov 04, 2009 • http://www.insure.com/articles/lifeinsurance/basics.html Whole Life Insurance Policy • Investopedia • http://www.investopedia.com/terms/w/wholelife.asp

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