Policy Structure Risks
Each type of life insurance has different risks associated with it. Variable life carries the most risk, while traditional whole life has the least risk. Policies are generally priced accordingly. As more risk is transferred to the policyowner, the cost of the coverage decreases. In some cases whole life can have a projected cost as much four times as that of variable life for the same insured, same coverage and same coverage period.
This does not mean that one type of insurance is better than the other. It means that policy owners should fully understand the risks that they are assuming before they acquire a life insurance policy. Policy owners also must understand that the more risk a policy has, the more closely it should be monitored and therefore they should select an insurance advisor who has the resources to do so.
Risks of Variable Universal Life
- Cash values and death benefits are not guaranteed.
- Death benefit will stay inforce as long as there is cash value to support it.
- Returns on cash value separate accounts can be lower than anticipated or even negative, which will result in higher premiums and/or a shorter coverage period than originally projected.
- Mortality and policy expense charges may increase to guaranteed levels which will require higher premiums than originally projected.
Risks of Traditional Universal Life
- Cash values and death benefits are not guaranteed.
- Death benefit will stay inforce as long as there is cash value to support it.
- Persistent declines in long-term bond rates can trigger a reduction in cash value rates which in turn will require higher premiums than originally projected.
- Mortality and policy expense charges may increase to guaranteed levels.
Risks of Whole Life with a Term Component
- Term portion of death benefit is typically not guaranteed.
- Persistent declines in long-term bond rates or poor mortality and expense experience will trigger a reduction in the dividend. If dividends are not high enough to cover the cost of the Term death benefit, unexpected premiums may become necessary or the Term component will lapse.
Risks of No Lapse Guaranteed Universal Life
- The death benefit is guaranteed, however the cash value is not. This will only have an impact if the policy is surrendered during the insured's lifetime.
Risks of Pure Whole Life
- Death Benefit and Cash Values are guaranteed as long as specified premium is paid every year for life.