Universal Whole Life Insurance Vs. Cash Surrender Value Insurance
- Cash value insurance includes whole life, variable life and universal life. All of these policies are policies that build a cash reserve in addition to providing a death benefit. The cash value and death benefit may not be guaranteed. However, all policies do offer cash value growth in some way. Fixed cash value products guarantee a minimum interest rate return. Variable insurance policies invest in mutual funds and do not provide any performance guarantees.
- Universal life is the most complex of life insurance. This is because it separates the cost of insurance from the investment function of the policy. The life insurance used in the policy is an annual renewable term policy, while the cash value account may be invested into a fixed or variable account. Either way, few, if any, guarantees are made on these types of policies. Even for fixed interest policies, the guarantee is limited to the interest rate and cost of the insurance. The costs of the policy may rise to a maximum amount, though the policy is designed to function on the assumption that costs will not rise to the maximum level. In this way, you take on some of the risk of the costs rising in the policy. If costs overwhelm what the cash value can earn, you stand to lose your life insurance.
- The benefit of cash value insurance is that you get cash value savings that you may use during your lifetime. These savings may be used for any purpose. With whole life policies, you borrow against the value of the contract. With universal life, you may withdraw money from the policy or borrow against the value. Policy loans are income tax-free regardless of the policy type. Withdrawals are tax-free up to your cost basis (the total amount of money you have paid in as premiums).
The benefit of whole life insurance is that all elements of the policy are guaranteed. The benefit of universal life is that you have more flexibility in the policy than with whole life. Even though you share a substantial portion of the risk with the insurer, you may increase or decrease premium payments and change death benefit amounts at any time, thus customizing your policy to your needs throughout your life. - Cash value policies are not always guaranteed. If you own a universal life policy, for example, you could have your policy lapse late in life if the costs rise by a certain amount. Regardless of the policy type, these policies all require substantially higher premium payments when compared to term life. As a result, you may not be able to afford as much life insurance as your family needs.