Some rorms of cash value life Insurance pay a variable return

The rate at which the cash value accumulates in a cash-value policy depends on the rate of return earned. Some forms of cash-value insurance have a guaranteed minimum rate of return, often 4 percent, but pay a higher current rate depending on the  success of the investments made by the insurance company with your premiums. Table 12.1 illustrates these rates. An understanding of these policies requires an examination of the premium, the cost of the insurance protection portion, the rate of return on the invested funds, and the company’s expense charges.

Universal Life Insurance 

Universal life insurance provides both the pure protection of term insurance and the cash-value buildup of whole life insurance, along with variability in the face amount, rate of cash-value accumulation, premiums, and rate of return. Initially, the purchaser selects a face amount, and the company quotes an annual

premium. The annual premium goes into the cash-value fund, from which the company deducts the cost of providing the insurance protection and charges for company expenses. As time goes by, the owner of the policy may reduce or increase the premium, with corresponding changes occurring in the insurance protection or amount added to cash value. If premiums drop below the amount necessary to cover the insurance protection and expenses, funds are removed from the cash-value account to cover the shortfall.   Essentially, universal life insurance combines annual term insurance with an investment program. Universal life policies are usually available in initial face amounts of $100,000 or more. The rate of return is tied to some interest rate prevailing in the financial markets or is dictated by the insurance company. The rate of return often exceeds those available under fixed-rate cash-value policies.


Variable Life Insurance
Variable life insurance allows you to choose the investments made with your cash-value accumulations and to share in any gains or losses. The face amount of your policy and the policy’s cash value may rise or fall based on changes in the rates of return on the invested funds. The face amount of the policy usually will not drop below the originally agreed-upon amount, however. Instead, the cash value will fluctuate. If you are unfamiliar with markets for corporate stocks and bonds and mutual funds, however, you should probably avoid variable life insurance. Many variable life insurance policies contain provisions calling for the payment of fees and sales charges before the policyholder can share in any investment returns. Variable life insurance policies should be read and analyzed very carefully before purchase.


Variable-Universal Life Insurance 

Variable-universal life insurance is a form of universal life insurance that gives the policyholder some choice in the investments made with the cash value accumulated by the policy. It is sometimes called flexiblepremium variable life insurance. The most popular form of cash-value life insurance, it most closely embodies the philosophy of “buy term and invest the difference.” Because you select the investment vehicles (a combination of stocks, bonds, or money market mutual funds), you can potentially realize a higher rate of return than is possible under other cash-value policy types. With this flexibility comes the risk of a lower rate of return, of course. As a result, variable-universal life policies usually provide no minimum guaranteed  rate of return. Table 12.2 summarizes the features of term life insurance, cash-value insurance with a fixed return, and cash-value insurance with a variable return.

Variable-universal life insurance also carries higher commissions and is more likely to require annual fees than other forms of life insurance. A 2 percent annual fee would change a policy with an annual return of 7 percent on its investments to one with a net 5 percent return.

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