Different Types of Whole Life Insurance

There are two categories of life insurance a person can choose to purchase: term or whole life. In most cases, Henssler Financial recommends term insurance over whole life. However, if you choose to purchase whole life insurance, you must decide which type of whole life insurance to purchase. Whole life insurance is a form of permanent life insurance that provides coverage for the life of the insured. There are several types of whole life insurance, including Variable Life, Universal Life and Variable Universal Life.

Variable Life Insurance

Variable life insurance (VL) is considered the predecessor of universal life. The two have similar characteristics. VL has a guaranteed premium and a guaranteed death benefit. VL was designed to combine the protection of traditional life insurance with the growth potential of investments. Usually, the investments consist of mutual fund type investments. The cash value of a VL policy is not guaranteed and is kept in a separate account. Premiums remain fixed, but the face amount and the cash value will vary depending on the policy’s earnings. A VL policy includes a guarantee that the death benefit will never be less than the initial face amount.

While the guaranteed premium and guaranteed death benefit make VL policies attractive, these policies have some draw backs. Some financial plans have assets in place that remain highly liquid and relatively safe. VL policies do not necessarily conform to this structure. Therefore, a VL policyholder must be comfortable with giving up an affirmed cash value in exchange for possibly enhanced death benefits. This is an exchange some people are not willing to make with their death benefit protection.

VL is riskier than other forms of life insurance. There is the potential for meaningful gains and/or losses. Because of the risk involved with VL policies, regulation requires greater disclosure than what is required for other life insurance policies. A prospectus must be given to someone considering the purchase of a VL policy.

Universal Life Insurance

Universal life insurance (UL) policies offer flexibility in premium payments and adjustability of death benefits. The difference between UL policies and other life insurance types is that the elements of the UL policy have been “unbundled.” By this, the insurer discloses the pricing elements separately (benefit costs, investment returns, and other expense charges and administrative fees). The charges are shown on the contract and/or the policy’s annual statement. Policyholders know exactly where their money is going. A “bundled” product is one in which the above elements are only discernible by the actuary who designed the product. The policyholder is charged a single premium rate for the product.

There are several marketing advantages for unbundled products. First, they give the impression of a predictable performance of the product. Secondly, from an investment point of view, the products look more attractive. For example, it is assumed that a person should buy UL because the term element in the UL is inexpensive. However, this is not relevant, because the term element is just as inexpensive in other permanent products, just less visible.

One of the most distinguishable features of UL is its flexibility. Money not used to pay expenses and mortality charges can accumulate in the cash value of the product. The insurance company will deduct expenses and the cost of the risk premium from the time the first premium is paid. The balance, along with received premiums and interest each month, goes to the cash value.

The fact that both cash value and the term element exist gives UL flexibility. This flexibility can also be viewed as UL’s greatest disadvantage. Inconsistent premium payments, or only paying the minimum payment, can lead to the policy becoming an expensive policy. Another disadvantage is the uncertainty of the rates of return, because they are based on current market conditions. If interest rates rise, the assets held will have a reduced market value. Should these assets have to be sold, the insurer will incur a capital loss. On the other hand, if interest rates fall, funds will have to be invested at lower rates.

Variable Universal Life Insurance

Variable Universal life insurance (VUL) is a combination of universal life and variable life. These policies are sometimes referred to as flexible premium variable life. They were designed to combine the flexibility of UL with the investments aspects of VL. VUL policies only guarantee the mortality rate and the rate to keep the policy in force.

VUL policies are subject to much of the same regulations as VL policies. For example, the cash values of these policies are housed in a separate account. These values are subject to fluctuation, and there is no guarantee of a minimum rate of return or principle. With VUL policies, income that is credited to an account is tax deferred (in some cases, this income can be tax free). The expense and mortality charges for the policy are paid for with before-tax income. The policyowner is offered an array of funds in which the residual funds can be invested and can hold these investments in numerous accounts. The policyowner also has the ability of transferring funds between accounts. VUL policies are useful for those who choose to view their life insurance policy cash values more as an investment than a savings account. If the separate account investment results are not favorable, the cash value could be reduced, and the policy could require additional premium payments.

Death benefits under VUL policies are more like UL policies than VL policies. The death benefit fluctuates with changes in the values of the assets. VUL policies, generally, do not contain a minimum death benefit guarantee.

In all, VUL policies are not simple and can be expensive. A person should fully understand how a VUL policy works before buying it. The policyholder has the task of ensuring the policy has sufficient supporting funds. As with VL policies, all the risk (except for the mortality risk) belongs to the policyholder.

As discussed, these types of insurance, universal life, variable life, and variable universal life have similarities, but also have important differences. It is imperative that a potential buyer of one of these policies fully understands the nature of the policy they are considering for purchase. A policyowner should be aware of the structure of the policy he is buying and must be willing to accept any risk associated with it. When comparing policies, several components should be taken into consideration to ensure the policies are compared equally: premiums, credited interest, administration expenses, mortality charges, and any other surrender or withdrawal charges.

The chart below should help simplify the nature of each of the policies discussed. In most cases, Henssler Financial recommends that all three types of whole life insurance be avoided

For more information regarding this topic, please contact Henssler Financial at 770-429-9166 or experts@henssler.com.

Disclosures

This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.