Consumers have a variety of options when choosing life insurance policies. While term life offers a death benefit, at the end of the coverage term, living policyholders receive no money back. Insurance investment policies offer life insurance coverage, along with an investment component, which can earn money over time. Common types of investment insurance policies, also referred to as permanent life insurance, include whole life, variable life and universal life.
Whole Life Insurance
Whole life insurance represents the oldest type of permanent life policy. Whole life insurance is intended to cover the policyholder for life, from the time of purchase, until the policyholder dies. Whole life policies typically include a fixed amount for the death benefit. With each premium payment, the insurance company applies a portion of the payment to the death benefit and the remainder to an investment account. The investment component of the policy can earn a cash value as interest accumulates. Policyholders have the option of withdrawing or borrowing against the accumulated investment funds. When the policyholder dies, the beneficiary can file a claim against the policy to receive the death benefit and the accumulated investment. Taxes become due only if the policyholder withdraws funds from the account, or when a beneficiary cashes out the policy after the death of the policyholder.
Variable Life Insurance
Policyholders can vary the investment component of a variable life insurance account. Insurance companies offer policyholders a portfolio of investment instruments, typically including bond funds, stocks, money market funds and equity funds. The policyholder can choose to deposit all money in a single instrument or choose multiple instruments. When investments perform well, the policyholder can earn money. If investments decline, the investor can lose money. While policyholders can lose a portion of the death benefit due to poor investment performance, variable life policies typically include a guaranteed minimum, below which the death benefit cannot decrease. While the variable life insurance offers a tax-deferred investment, policyholders cannot withdraw funds from the accumulated earnings. Upon the death of the policyholder, the beneficiary can file a claim to receive the death benefit and the investment portion of the policy.
Universal Life Insurance
A portion of a universal life insurance premium payment covers the insurance component of the policy, while the remainder goes toward investment. The investment component of the policy earns a cash value based on an annual interest rate. Yearly premiums of a universal life policy can vary. Policyholders can elect to use accumulated interest to pay all or a portion of the premium. As the investment portion of the policy grows, the policyholder can elect to increase the amount of the death benefit, depending on the terms of the policy. Policyholders can also elect to lower the death benefit, although policies typically specify a minimum, below which the policyholder cannot decrease coverage. When the policyholder dies, the beneficiary can receive the death benefit along with the investment portion of the policy.
