Types of Cash-Value Policies
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There are many different types of cash-value policies. Among the most common are whole life, universal life, and variable life policies. Here’s how they differ:
• A whole life policy, the traditional form of cash-value insurance, invests mostly in bonds and earns a fixed, modest rate of return.
• Universal life policies let you adjust your premium and death benefit every year to suit your changing circumstances. Parts of your premiums are invested in short-term securities similar to those in money-market mutual funds, paying money-market rates of interest. Premiums are flexible: you may even be able to skip adding to the cash value if money is tight-though you’ll probably be forced to pay higher charges later on.
• Variable life invests your cash value in your choice of stock, bond, or money-market funds. Returns fluctuate according to the markets and the fund manager’s investing skill. Variable life policies generally deduct sales charges and other annual expenses that can cut their cash-value returns in half over the first 10 years you own them.
If you’re shopping for a cash-value-policy, be especially careful: such policies are so complex that it’s extremely difficult to compare the costs and benefits of different insurer’s offerings. At a minimum, ask each agent what assumptions he or she is using to calculate policy illustrations. Some illustrations assume that cash-value accounts will earn an average of 8% a year for 20 years, for example, even though the kinds of things they invest in may now yield only 6%. Also ask the agent to verify that the interest rate figures are net of expenses, since that’s what you’ll really earn. Tell the agent to show you what would happen to your cash value if the insurer earned two percentage points less that anticipated, just to be sure. Also get a worst-case scenario –what the cash-value buildup would be if the insurer ends up paying the mere guaranteed rate, typically 4% to 5%.
No matter which type of life insurance policy you want, don’t sacrifice safety for price. If your life insurer goes belly up, your coverage will be worthless. So stick with an insurer that gets a safety agency A. M. Best or AA-from Standard & Poor’s. Books detailing both agencies’ ratings are available at most public libraries.
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