Cash-value Life Insurance – an Overview

Several persons form opinions about life insurance without realising how varied they are. The variability among life insurance plans extends to the supplementary benefits offered with them. Some insurers even combine cash value plans with annuities. However, one can spot a fundamental difference among cash value plans, particularly in terms of their structure.

i) Endowment insurance

This operates on the basis of a guaranteed sum assured. If the insured dies before maturity, the insurer will pay the sum assured once the plan is in force. If the insured survives the period, the policy owner would receive the sum assured in full. Endowment insurance matures either at a specific age or after a set period.

ii) Whole life insurance

These plans usually provide lifetime coverage for a level premium. Cash values build in Whole Life plans after two to three years generally. This is a key difference between Whole Life and Universal Life plans. Permanent life insurance typically exists up to age 100 or a lifetime, whichever is shorter. Upon death or maturity, the sum assured and net cash value is paid to the estate of the insured or the insured respectively. Whole life plans can be distinguished according to premium payment periods or inclusion of dividends. Dividend paying Whole Life plans can be very profitable.

iii) Universal Life insurance

Universal life (UL) insurance is a more flexible form of life insurance. There are fixed and variable universal life plans. Fixed plans operate with declared interest rates while variable UL plans have fluctuating cash values and death benefits based on returns from a mutual fund investment-type. Some Universal plans have level premiums while other use increasing premiums.

With some level-premium UL plans, the cash values are used to compensate for the higher risk of insuring. This is not always the case and depends on the policy of a particular insurer. Interest is earned on these plans from inception and premium allocation is transparent. This is another key difference between UL plans and Whole Life plans. Universal Life plans offer flexible premiums where the payer could add more to the investment portfolio if he or she so desires.

There are many cash value plans to choose from. Some plans operate better than others across several contexts. Certain plans might appear more beneficial in specific circumstances than others are. Indeed, there are life insurance plans to suit every need and some that may even boost your savings favourably. Insurers have some discretion with the value they add to life plans.

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