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What
is participating whole life insurance?
Participating
(par) whole life insurance has been marketed for many years in the U.S. The
participating feature allows for the payment of dividends to policyowners when
actual experience justifies such payment. Substantial amounts of participating
whole life insurance is still sold today, principally by the large mutuals.
I
have heard a lot about universal life insurance. How is this type of life
insurance different from traditional whole life insurance?
Both
traditional whole life (WL) and universal life (UL) products are examples of
cash-value life insurance. However, there are several important differences
between these two products. While WL policies contemplate the payment of fixed,
level premiums and provide for level death benefits, UL policies offer
adjustable death benefits and flexible premiums that can be varied according to
changing circumstances. This is a rather simplistic comparison, however, since
policyowner dividends under participating WL insurance contracts can be used to
offset a portion of the premium payment otherwise required; in addition,
dividends can be used to increase the policy's death benefit. Because of these
and other possible uses of policyowner dividends, an argument can be made that
participating WL insurance possesses some (but not all) of the same
flexibility/adjustability that is possessed by UL policies. Another important
difference between WL and UL relates to product transparency. In UL policies, it
is easy for policyowners to look at the internal operations of the policy and to
examine the relationships among various policy elements (premiums, cash values,
interest
credits, mortality charges, and expenses) and how they interact with each other.
Which
type of cash value life insurance policy, universal life (UL) or participating
whole life (WL) , is a "better buy" financially?
There
is no simple answer to this question. The best performing product (from a
financial perspective), whether UL, WL or some other type of cash value life
insurance, will likely be the one offered by the insurer that enjoys the best
future experience as it relates to interest earnings, actual expenses and
mortality costs. Insurers earning the highest investment income, and who also
incur the lowest expenses and the lowest mortality costs, are in the best
position to offer life insurance at the lowest cost. This is true whether the
cash value life insurance product being offered is UL or WL. Thus, it will be
necessary for prospective insureds and their advisers to carefully examine the
financial aspects of each product under consideration, irrespective of whether
the product is UL or WL.
What
is variable life (VL) insurance, and how is it different from universal life
(UL) and participating whole life (WL)?
Variable
life insurance is a type of fixed-premium whole life insurance policy where
changes in the policy's cash values and death benefits are directly related to
the investment performance of an underlying pool of assets. Policyowners
typically can choose among several investment options as to where the assets
backing the policy's cash values will be invested. The various investment
options offered in the contract generally possess different risk/return
relationships and frequently include a money market fund, a bond fund, and one
or more common stock funds. Although the policy's death benefit is directly
related to the actual performance of the invested assets, the policy prescribes
that the death benefit will not fall below a minimum amount (usually the initial
face amount) even if the invested assets depreciate in value by a substantial
amount. Because the policyowner assumes all of the investment risk, there is no
similar "floor" below which cash values may fall. In recent years
variable universal life (VUL) insurance has become a more popular product than
VL. VUL combines features of both UL and VL and, in essence, is the flexible
premium version of VL.