Financial Literacy Part 5--Understanding Variable, Universal and Equity Indexed Life Insurance Options

This week we are continuing our simplified discussion about life insurance policies and the differences between them all. Again, we are just going for an easy, glossy overview here so that you get the concept--this is not an in-depth tutorial at all, but it will certainly prep you for one.

If you remember last week, we talked about the difference between permanent (or whole) life and term. The policies we are discussing today are all considered permanent life too. So just like regular whole life policies, the policies below will all offer a level death benefit with a level premium as long as the policy does not lapse due to non-payment. The only real difference between the policies below and traditional whole life is the way the cash values grow and the potential flexibility in premiums.

Variable Life Insurance: Variable life insurance policies have many different sub accounts that your excess premiums (those above the cost of insurance) can be invested in. These sub account are like little boxes filled with different mixes of stocks, bonds, money markets and more and when your cash goes in the boxes you've chosen, it grows or shrinks depending on the performance of the assets in the boxes. The mix of investments within each box will determine how risky it is. That lets you direct your money into several different boxes to create a mix of risky and not-so-risky investments that you are comfortable with.

Equity Indexed Life Insurance: Equity indexed policies work like variable policies except that instead of a little box of assets, your cash value growth is tied to the performance of one of the stock market indices. So if you've chosen the S&P and it goes up over the course of a month (the time frame for growth can vary by policy) then it's possible the value of your cash value has as well. The growth of the cash value in an equity indexed policy has a minimum (or floor) that it can not earn less than and a maximum (or ceiling) that it can not earn more than. This differs from variable life which has no minimum guarantees or maximum limits.

Universal Life Insurance: Like traditional whole life policies, universal life policies offer fixed growth of cash values but they offer flexibility in premiums. You can pay just a little bit over the cost of insurance or you can pay the maximum allowable amount over the cost of insurance--or you can pay something in between. If you have cash values and you pay less than the cost of insurance for the policy, your policy won't lapse because your cash values will be used to make up the difference. There are also variable Universal policies and Equity Indexed Universal policies which offer the flexible premium of a universal policy with the cash value investment options of their namesakes.

There...that wasn't too bad, was it? I hope not. Next week we'll take a break from this series and talk about some current events that may affect your wallet.