There are two main options for life insurance coverage: term and whole life. Term life insurance is a straight forward type of policy that pays benefits following the death of the policy holder. Whole life has a death benefit but also accrues a cash value and is considered an investment. An investor has other options as well for insurance policies that act as investment vehicles.
Whole Life
Policy holders pay predetermined premiums as long as the policy remains in force. The premiums remain constant while cash value accumulates on the interest on a tax-deferred basis. Often, dividends are paid to the policy holder, which can be folded into the account and remain without a tax burden. The insurance company chooses the investments, and the policy holder can wait until he is in a lower tax bracket after retirement to take dividends or payouts. Loans are allowed from whole life policy that must be repaid with interest. Whole life policies pay the entire face value of the policy upon the holder's death or at the age of 100, when the policy is terminated.
Universal Life
The premiums on a universal life policy are moved into an account that accumulates interest. Policy holders can borrow against a universal life policy or withdraw the cash value. Interest also can be used to pay the premiums. Creditors cannot tap into the cash value of a universal life insurance policy, often a favorable investment option for small business owners who face uncertain futures. As with whole life, the entire cash value of the policy is paid to the beneficiary upon the death of the policy holder.
Variable Life
Variable insurance policies provide policy holders with options for investing. The cash value can be moved into stocks and bonds, but the policy holder assumes the risk with no guarantees from the insurance company. There is a guaranteed death benefit that goes along with variable life insurance policies, report consultants at John Hancock, although the final payment may be subject to market influences that affect the final payment and the type of options that were contracted for when the policy was purchased. There typically are annual management fees and other charges associated with variable life policies. Variable life insurance is treated as a security and is monitored by the Securities and Exchange Commission, report financial consultants at Consumer Fed.org.
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