6 The Life Insurance Buyer’s Guide
July 2011
A very important aspect of whole life policies is that they have a cash value. This means the
policy also has a savings aspect for the insured. A portion of each premium payment goes into
the cash value. The policy owner can access this money in a number of ways. Whole life policies
have to contain a schedule that shows the owner the minimum value he can receive if he
decides to surrender the policy. However, surrender is not the only way to access the funds.
Loans can be taken out up to the cash value; however, interest is charged for this loan, which
can be repaid at any time. If the policy is surrendered, the loan is deducted from the cash value.
If the insured dies, the loan is deducted from the face amount.
Cash value can also come in the form of dividends from the company. A policy can be
“participating” or “non-participating.” If the policy does pay a dividend, it is a participating
policy. If no dividend is paid, the policy is considered non-participating. Dividends may be taken
as cash, used to purchase paid up insurance or can be applied to reduce a premium.
The following types of policies (variable life, universal life and variable universal life) are a bit
more complicated and can be somewhat confusing. It is very important that you seek out an
agent who has experience with these types of policies before you commit to a purchase.
Variable life insurance (variable whole life) – This is another type of permanent life insurance.
However, the death benefits and cash account values are determined upon investment options.
These investment options are usually in the form of mutual funds. Each company has different
investment options and the policy owner is allowed to choose which types of funds to use.
Most offer at least a stock fund, a bond fund, and a money market fund. Variable life insurance
offers fixed premiums and a minimum death benefit. If the return on the investment options is
high, then the account value of the policy will grow. Be aware that the account value can vary
from year-to-year and even day-to-day based on the performance of the investments options.
The performance of the investment options is not guaranteed. Remember, you as the policy
owner are the person responsible for choosing the investment options - not the insurance
company.
Flexible premium adjustable life insurance (universal life) – Universal life is a flexible premium
life insurance policy that has an adjustable death benefit. This life insurance policy has an initial
premium and flexible premiums afterwards. The policyholder can select the future amount and
the frequency of his premium payments, within limits, and can also stop and start premium
payments. It is very important to be aware of the account value in these types of policies to be
sure there are always enough funds to keep the policy in force.
As premium payments are made, they accumulate within the policy at a fixed rate of interest
and create an account value. This interest rate is determined by the company, changes
periodically (usually each year) and cannot go below the guaranteed minimum interest rate
stated in the policy. Each month, policy expenses are deducted from the account value. The