Whole life insurance - also called permanent or cash value life insurance - differs from term life insurance because the coverage lasts as long as you pay the premiums. Because of this, however, the insurance company assumes more risk and consequently charges you higher premiums.
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Whole life insurance premiums offset the higher cost associated with the increasing likelihood of mortality in the policy's later years by "overcharging" for insurance in the earlier years. The amount you "overpay" in premiums goes into a cash value portion of the account that is legally required to become available to you after a certain period of time. You can often take out a loan against this cash value, or use it to pay premiums if money is tight. The loan is not subject to credit checks, but must be repaid with interest - and reduces the death benefit payment until paid back.
Types of Whole Life Insurance
- Universal (or adjustable) life adds flexibility because it allows you to vary your premium payments in amount and frequency after the cash value account becomes available. If you pay less in the beginning, you'll probably have to pay far more later - to prevent your policy from lapsing, death benefit being reduced or your cash value from evaporating.
- Variable life adds a savings account investment element that allows you to invest your paid premiums in a variety of stocks and bonds. This option is risky, because it reduces or raises the death benefit depending on the performance of the investments. Some policies prevent the death benefit from dropping below a certain amount, but their premiums are higher.
- Variable universal life provides the features of both variable and universal: you can vary your premium payments in amount and frequency after a certain period, and you can invest the paid premiums to affect the death benefit amount.