Because of some of the criticisms of the low investment/savings yield characteristics of standard whole life policies, life insurers have developed variant forms of whole life coverage that have the potential to deliver somewhat higher investment yields. However, these come with greater degrees of investment risk. Common categories of such variant whole life products are adjustable life, universal life, and variable life policies.
Each of these types of policies provides a death benefit and is usually a level premium policy for the lifetime of the insured. They differ from conventional whole life policies in how the cash value account is handled.
Variable life policies are the riskiest of these three categories. The cash value account is not guaranteed by the insurer. Depending on the insurer and the policy, the insured decides what investment vehicle the cash value portion of the premium will be invested in. The available investment options may be the same investment funds managed and operated by the insurer that its variable annuity customers can choose to invest their annuity balance in. These are like mutual funds in the sense that they involve different balances between stocks and bonds or other market sectors, but are usually not publicly traded.
Because of these aspects of variable life policies, the cash value account is subject to the general market conditions and the risk of decline in investment value, as well as gains. So, while variable life policies create the potential for greater cash value accumulation than standard whole life policies, they also include a risk of investment loss not presented by standard whole life policies. As a result, variable life policies can only be sold by persons who possess a National Association of Securities Dealers (NASD) license and who are registered with the Securities and Exchange Commission.
This form of whole life insurance is much closer in concept to standard whole life insurance. Unlike a standard whole life policy, which has a fixed interest rate on the cash value account for the life of the policy, the universal life policy has a guaranteed minimum interest rate. This rate can fluctuate up in response to the insurer's financial performance and general market conditions. Many life insurers permit a universal life policy to grow with the insured.
They contain provisions that periodically permit the insured to increase the policy limit by a percent specified in the contract, without the requirement of proving insurability, at a commensurately larger premium. Such provisions usually also accelerate the rate of cash value build up. Often, such increases in limits provisions stipulate that once the insured refuses to accept a periodic increase in limits, the policy limit and premium then becomes fixed for the life of the policy. From that point forward, it cannot be increased further, except by cancellation and rewriting a new policy, subject to new proof of insurability.
Universal life policies also let the insured change the amount of the death benefit and the amount and timing of premium payments from time to time. Increases in the death benefit often require new proof of insurability. Universal life policies can be structured so that when dividends are paid by the insurer, they can be credited to the cash value account.
Adjustable life policies are similar to universal life policies, and indeed, none of these categories is strictly defined. Insurers often offer policies that combine various features of adjustable, universal, and variable life policies. Almost any permutation is possible.
Adjustable life policies are more in the nature of hybrids between term and whole life policies. In addition to allowing the insured the option of periodically altering the death benefit level (with corresponding changes in premiums due), adjustable life policies also allow the insured the flexibility to switch the coverage to term coverage for a period (during which there will be no additions to the cash value account), and later to switch back to whole life.
This feature can be attractive to persons who anticipate occasional cash flow crunches. This type of policy could potentially be attractive to a selfemployed person whose income might fluctuate or to persons who wish to get started on a whole life policy early in life, at an age when their rates will be lower, but who may wish the flexibility to switch temporarily to term coverage to reduce premiums. This can be due to a sudden blip in their budget, such as the birth of a child or saving for the down payment on a house or condominium, or various other reasons.
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Note: This article was sent to us by: Walt Bielfield at 10072010
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