Whole Life Insurance
Of all the life insurance options, whole life insurance is one of the most inclusive. Whole life insurance, unlike term life insurance, is an insurance policy written to insure against death until you die. Consider it very much like a funeral savings account, that, no matter when you pass away, will have as much money in it as the policy is written for.
This is one of the biggest benefits of whole life insurance, that you can count on a full payment of the policy value at the time of death. A term life policy does not extend for your whole life, and instead ends after a pre-determined number of years. Pass away after the term is over, and you'll receive zero benefits.
Few people realize that whole life insurance policies are practically insured investment accounts, and that current market conditions have as great of an affect on your premiums (for some policies) as your current health status. Take into consideration whether or not you want your life insurance and monthly premium tied to the financial markets when you choose between one of the six types of whole life insurance listed below:
A non-participating policy is one of the more expensive types, since the insurance company accepts more risk in writing a non-participating policy. Essentially, all the numbers and values assigned to the policy including death benefits, cash surrender, and premiums are fixed for the life of the contract. Thus, no changes are to be made after signing, and the insurance company cannot raise your premiums to adjust for changes in risk profile.
A non-participating policy is great for the consumer, because all the variables of other policies are locked in from the start. If you want a hands off policy, a non-participating policy fits this need quite well. Think of non-participation as not taking part in the risk of the investment account.
Indeterminate Premium Policies
An indeterminate premium policy is virtually the same as a non-participating policy, but with one major exception: the premium may rise or fall from year to year. Your benefits, however, will not be adjusted. The indeterminate premium policy shares equally the risk of market fluctuations between the insurance company and the consumer.
A participating policy is the opposite, where the insurance company shares the upside, but not the downside, with the policyholder. Thus, if you were to purchase a participating policy of $100,000 and the account were to grow to $110,000, you would be owed those excess profits known as dividends.
It is important to note that insurance companies do have an incentive to make a policy pay dividends. Thus, a participating life insurance policy will likely have higher premiums, but commonly pays out the excess at the end of the term. If cashflow is an issue, opt instead for non-participating whole life insurance, as the premiums will be lower, though you will not receive dividends over and beyond the total policy value.
Blend or Economic Policies
Blend policies bring together one participating and one term life policy into a simple life insurance plan. The dividends used from the participating policy are used to purchase another term life policy, which helps increase the death benefit for the allotted term. This is a popular choice for those who want whole life insurance to pay for their funeral and burial costs, as well as a term life policy to cover their income should they pass away with dependent children in their younger years.
A limited pay policy is much like a participating policy with a major exception: premiums are paid only for a certain term. During this term, a flat premium is paid and the benefits are set to be paid out at a pre-determined age, or at the time of death. Often, these policies are sold more as guaranteed investment accounts than life insurance, and are commonly pitched by financial advisors rather than an insurance agent.
Within limited pay policies we also find another type of life insurance, the single premium policy. A single premium, much like an annuity, it paid all at one time, and the benefits are paid out at the time of death. These whole life policies generally incur fees for early withdrawal as well as annual management fees on the cash value of the policy.
Excess Interest Whole Life Insurance
Excess interest policies are a very new, and very exotic, type of life insurance. With an excess interest policy, the dividend return on the cash value varies with market conditions, while the death benefit is standard. The result is an insurance policy with a variable monthly payment, and exposure to the debt markets. This would be a great policy to hold during times of rising interest rates, though when rates fall, your premium will rise to make up the difference.