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Washington State Office of the Insurance Commissioner
Whole life
This is the traditional form of cash value life insurance. Also referred to as “ordinary
life” or “straight life,” whole life insurance provides coverage for your entire lifetime.
The premium depends on your age at the time you buy and stays the same as you
grow older. The lowest premiums go to those who buy it when they are young,
because they will pay into it the longest. Your cash value grows based on a fixed
interest rate set each year in your policy by the company.
Some whole life policies let you pay premiums for a shorter time, such as 15 years,
or until you reach age 65. Premiums for these policies are higher because you make
premium payments during a short time frame.
Universal life
This is a type of flexible cash value policy that lets you vary your premium payments.
You can also make limited adjustments in the death benefit amount of your policy. The
company credits the premium you pay to a policy account that earns interest. The
company then deducts the expense charges from the account. If your yearly premiums
plus the interest the company credits to your account is greater than the cost of the
insurance, your account will grow. However, if your premiums and interest earnings
are less than the cost of insurance, your account will decrease. If your account keeps
dropping, your coverage will end. To prevent this, you can increase your premium
payments or lower the death benefits.
Variable life
As with universal life, the death benefit and cash values of variable life insurance vary.
With variable life, the company invests your cash values into separate investment
accounts, such as portfolios of stocks, bonds, and other investments. These separate
accounts are like mutual funds. The company should provide you with information
(also called a prospectus) that describes each separate account. Study the information
carefully. As the policy owner, you choose the separate account to invest the cash
value. The cash values and death benefit vary due to increases or decreases in the
value of the separate accounts. You take the investment risk as the policyholder in
return for possible improved benefits.
Life insurance illustrations
For most individual policies, cash values, death benefits, or premiums vary based
on factors the company cannot guarantee (such as interest rates). Companies use
computer-generated illustrations, such as a table to show how policies perform over
the years under given assumptions. The illustrations show how benefits that are not
guaranteed will change each year as interest rates and other factors change. The