Variable Life Insurance
In addition to offering annuities, insurance companies also offer a variety of life insurance products. Both life insurance and annuities offer a death benefit, which is paid to a beneficiary. With an annuity, the beneficiary receives the original investment plus any earnings. With life insurance, the beneficiary receives the face value of the policy.
Term life insurance is purchased for a specific amount of time. The purchaser pays premiums that provide a guaranteed death benefit to a beneficiary if the insured dies during the term of the contract. If the insured does not die during this period, the death benefit expires. The purchaser has the option to renew the insurance policy, although renewing will be much more expensive, because the insured is now at a higher risk for death. Term life insurance does not build any cash value. The premium paid by the policyholder is never returned to the purchaser.
Whole life insurance does have an investment component. The purchaser pays a fixed premium over the life of the insured, and the insurance company guarantees a minimum amount of payout upon death. Part of the premium goes into a cash value, which earns a tax deferred, guaranteed interest rate. Similar to a fixed annuity, the insurance company draws from a general account, and if the general account does well, the cash value may grow more than the guaranteed rate. At any time, the policy owner may withdraw part of the cash value or borrow from it.
Universal life insurance is a type of whole life insurance that provides the purchaser with more flexibility in terms of the death benefit and the premiums. Universal life insurance premiums can be adjusted depending on the amount of coverage the purchaser desires, allowing her to save money if she decides she doesn’t need as much coverage.
Variable life insurance differs from whole life insurance in that the cash component does not earn a fixed interest rate but may be invested in se