How Whole Life Insurance Policies Work

If you’ve been shopping for insurance coverage and already ruled out term, also known as temporary coverage, then you likely have questions about the different kinds of permanent, or whole life policies available. Fortunately, there are multiple variations on the concept of permanent insurance, most of which are defined by their menu of features. And while some carriers sell many types of permanent coverage, there are essentially four major categories in the permanent niche. Here’s a short review about the four, how to sell a policy, and how their features differ.

Whole Life

Within this category, the basic whole policy is two things in one. It offers a standard death benefit based on your preference, but also features a savings account aspect that grows in value over time. As you continue to make premium payments on time, the savings, or cash value, rises to a level that allows you to either borrow against the balance or sell the policy and receive a price that is higher or lower than the calculated cash value at that point in time.

Selling a Policy for Cash

The main characteristic of these kinds of contracts, as opposed to term insurance, is that the policyholder can sell them for cash. You can review a guide on the topic if you want to learn more about the process of selling your life policy in order to receive a cash payout, which can be used for anything you want. Holders sell for various reasons. Sometimes it’s to cover a financial emergency or just to take a vacation or pay for a child’s wedding.

Universal

Generally, universal insurance contracts are much more flexible than traditional versions of permanent coverage, like whole life. That’s because they contain a savings element that you can use to offset the amount of the premiums you pay. Once the savings feature contains enough money, you can spend that money in order to reduce premiums. Additionally, with this kind of coverage, policyholders can opt to increase the amount of the death benefit as long as they’re willing and able to take and pass a physical exam.

Variable

Some people who want to invest the cash value of a policy opt for variable contracts. Variable policies let holders choose where the cash value money is invested, whether that means stocks, bonds, or mutual funds. Note that while a variable plan can grow quickly, in terms of cash buildup, it can also decrease in value if you choose your investments poorly. Plus, if the invested amount takes too big of a hit, the cash balance could evaporate completely, and the death benefit might even go down. However, most companies that sell variable insurance products offer guaranteed minimums for the death benefit.

Variable-Universal

What is often viewed as the best of both worlds, variable-universal policies let holders choose where to invest the cash buildup, but also allow for the adjustment of premium levels and the amount of the death benefit. There are plenty of choices with these insurance products, which means you need to take an active role in monitoring the policy’s value from year to year.