Preferred Financial Group

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Frequently Asked Questions

"What Types Of Cash-Value Policies Exist?"

 

Essentially, there are three types, or categories, of cash value life insurance, each with a different spin on how the cash value component of the policy is handled in terms of accumulation from premium and investment return. A brief explanation of each type follows:

Whole Life: Covers you for your entire life, as compared to a term policy which covers you for a specified period of time. The premium you pay has two components, the first of which covers the straight insurance portion of the policy (equating, in a sense, to a term policy). The second component builds cash value, including a guaranteed investment return. The cash value accumulates tax-deferred and can be borrowed against or withdrawn. Within the whole life insurance universe there are a few options:

 

Universal Life: A hybrid of term insurance and cash value insurance. The foundation is a term-type policy with a slightly increased premium which is directed to a cash account in the policy. This cash account earns a specific rate of interest and accumulates tax-deferred for the life of the policy.

        • Traditional—Has a fixed premium, a fixed death benefit and provides a guaranteed minimum interest rate.  
        • Interest-sensitive—Much like traditional, it has a fixed premium and fixed death benefit, but allows for an increase in death benefit if returns on cash value rise.
        • Single-Premium—One premium payment at the time of purchase that provides a fixed death benefit for life and a cash value account that grows with investment returns, accumulates tax deferred, and is available to be borrowed against.

 

Variable Universal Life: A hybrid of term insurance and cash value insurance. The foundation is a term-type policy with a slightly increased premium which is directed to a cash account in the policy, much like the Universal Life policy. Here is where it differs: Rather than earning a specific rate of interest, the cash account can be directed to a variety of investments, such as mutual funds. The cash value, along with the investment return, accumulates tax-deferred for the life of the policy.

 

Universal Life: A hybrid of term insurance and cash value insurance. The foundation is a term-type policy with a slightly increased premium which is directed to a cash account in the policy. This cash account earns a specific rate of interest and accumulates tax-deferred for the life of the policy.

        • Traditional—Has a fixed premium, a fixed death benefit and provides a guaranteed minimum interest rate.  
        • Interest-sensitive—Much like traditional, it has a fixed premium and fixed death benefit, but allows for an increase in death benefit if returns on cash value rise.
        • Single-Premium—One premium payment at the time of purchase that provides a fixed death benefit for life and a cash value account that grows with investment returns, accumulates tax deferred, and is available to be borrowed against.