Characteristics of Whole Life Insurance

by MichelleJorgensen ; Updated July 27, 2017

Life insurance is insurance you purchase that provides money to your beneficiaries in the event of your death. It is classified as either term insurance, which provides coverage for a set amount of time, or whole life insurance, which according to Smart Money is “a term policy with an investment component." There are 4 types of whole life insurance policies: traditional, universal, variable, and variable universal. All four have similarities. They protect you for your entire life and build cash value over time, but they also have several differences.

Traditional whole life insurance

When you purchase a traditional whole life insurance policy, the amount of your premium does not increase over time, unlike a term insurance policy. It provides permanent protection in that it never has to be renewed or converted. A traditional whole life policy has a cash value you can borrow against in time of need. The cash value of your policy continues to grow, tax deferred, and is designed so that its cash value accumulation equals the amount of the policy's face value when you turn 100 years old. Upon your death, your beneficiary is guaranteed the face value of your policy, or possibly more, depending on your investment choices along the way.

Universal life insurance

Universal life insurance is sometimes referred to as a flexible premium life insurance policy because it allows you to determine the amount and frequency of premium payments, and to adjust the policy face amount up or down to reflect your changes in needs. No new policy needs to be issued when you want to make changes. You also can withdraw part of the cash value; the death benefit and cash value are then reduced by that amount.

Variable life insurance

Variable life insurance is designed to combine the protection and savings features of life insurance with the growth potential of common stocks. Variable life insurance benefits, payable upon death or surrender, vary with the investment performance of an underlying portfolio of securities. However, the premiums charged are fixed. These policies provide you with a guaranteed minimum death benefit, and the cash value increases or decreases daily, with no guarantee as to the amount of cash value.

Variable universal life insurance

Variable universal life insurance, also known as flexible premium universal life, blends many features of traditional whole life, universal life and variable life. Premium flexibility, cash value investment control and death benefit flexibility are key among these features. Your variable universal life policy is issued with a minimum scheduled premium based on an initial specified death benefit. Once you pay this initial premium, you can pay whatever premium amount you wish provided adequate cash value is available to cover periodic charges and the cost of insurance. If you wish to increase your death benefit, you can pay additional premium into your plan. The cash value is invested in equity and other securities through separate accounts and subaccounts, so there are no guaranteed earnings. You are taking an investment risk.