Whole life insurance is one of the types of cash value life insurance types. These types of life insurance policies are often referred to as permanent life insurance, in that there is no ending date, provided the policyholder remains up to date on premium payments. Whole life does have some minor differences from the other permanent life insurance types.
Types
Whole life may be the best known permanent life insurance variety, but universal life and variable life are similar in certain aspects. All three types of life insurance build cash value that is expected to grow over time, and all will pay a death benefit when the policyholder dies. There are minor differences in the cash value aspect and how it is used and how it affects the policy.
Function
Cash value life insurance policies build the cash value by charging more than the actual cost of the life insurance. The additional amount paid in premiums is then put into a separate account that is invested or will draw interest. With whole life and universal life, how the money is invested is at the discretion of the insurance company. Variable life policyholders do have a say in how their money is invested. A combination of variable and universal life, known as variable universal life insurance, also gives the policyholder the right to choose how their money is invested.
Effects
The performance of the cash value account does not alter the premium payments or the face value--the death benefit--of a whole life policy, but it does affect variable life and universal life policies. The cash value of a universal account can be affected depending on the premium amount paid, as policyholders have minimum and maximum amounts they may pay. A variable life policy will see the face value increase if the investment aspect performs well and reaches a pre-determined amount, while most of these policies do have specified minimum face value amounts. Variable, universal and variable universal policies can lapse if the cash value account drops below a minimum value.
Benefits
The cash value of a policy can be withdrawn or borrowed against by universal life, variable universal and whole life policyholders. Variable life policyholders may borrow against the cash value of their account but may not withdraw the money. Borrowing against the cash value will lower the death benefit in variable and variable universal policies.
Considerations
All types of permanent life insurance will cost more than buying term life coverage due to the additional amount that is used for investment and savings. Over time, a permanent life insurance policy will become comparable to, or possibly lower than, term life insurance that was constantly renewed due to the increased age of the policyholder.
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