The premium depends on your age at the time you buy and stays the same as you grow older. The lowest premiums go to those who buy it when they are young, because they will pay into it the longest. Your cash value grows based on a fixed interest rate set each year in your policy by the company.
Some whole life policies let you pay premiums for a shorter time, such as 1 5 years, or until you reach age 6 5. Premiums for these policies are higher because you make premium payments during a short time frame.
Universal life
This is a type of flexible cash value policy that lets you vary your premium payments. You can also make limited adjustments in the death benefit amount of your policy. The company credits the premium you pay to a policy account that earns interest. The company then deducts the expense charges from the account. If your yearly premiums plus the interest the company credits to your account is greater than the cost of the insurance, your account will grow. However, if your premiums and interest earnings are less than the cost of insurance, your account will decrease. If your account keeps dropping, your coverage will end. To prevent this, you can increase your premium payments or lower the death benefits.
Variable life
As with universal life, the death benefit and cash values of variable life insurance vary. With variable life, the company invests your cash values into separate investment accounts, such as portfolios of stocks, bonds, and other investments. These separate accounts are like mutual funds. The company should provide you with information (also called a prospectus) that describes each separate account. Study the information carefully. As the policy owner, you choose the separate account to invest the cash value. The cash values and death benefit vary due to increases or decreases in the value of the separate accounts. You take the investment risk as the policyholder in return for possible improved benefits.
Life insurance illustrations
For most individual policies, cash values, death benefits, or premiums vary based on factors the company cannot guarantee (such as interest rates). Companies use computer-generated illustrations, such as a table to show how policies perform over the years under given assumptions. The illustrations show how benefits that are not guaranteed will change each year as interest rates and other factors change. The illustrations also show what the company actually guarantees and what could happen in the future. Remember, no one knows what will happen in the future. If the policy does not perform well, be prepared to adjust your financial plans.
You should be aware that due to past sales abuse, companies cannot use the term “vanishing premium” in life insurance illustrations. Vanishing premiums imply that you start out making large premium payments for the first several years of your policy with the possibility of no payments later on. There is NO guarantee this will occur.
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