A straight life insurance policy is a type of permanent insurance that provides a guaranteed death benefit and has fixed premiums. This traditional life insurance is sometimes also known as whole life insurance or cash value insurance. People always ask: A straight life policy has what type of premium? Continue reading below to discover what straight life is, how it works, pros and cons, and the premium It covers.
With a straight life policy, a portion of your premium pays for the insurance and the rest accumulates tax deferred in a cash value account.
You may be able to borrow against the cash value, but any amount that you haven’t repaid when you die reduces the death benefit.
If you end the policy, you get the cash surrender value back, which is the cash value minus fees and expenses. However, ending the policy means you no longer have life insurance and no death benefit will be paid at your death.
How does straight life insurance work?
Straight life insurance is a type of permanent life insurance that provides a guaranteed death benefit and has fixed premiums. Also known as whole or ordinary life insurance, the policy has a term length that lasts your entire life. This is different from term life insurance which expires after a set number of years.
A straight life policy has what type of premium?
Straight refers to the premium structure of the whole life insurance policy. This terminology denotes that premiums for the plan will be level, meaning they will not increase or decrease during the life of the policy. For example, you could have a $100,000 straight life insurance policy for which you pay $30 a month. In this case, that $30 premium would not change for your whole life.
Other whole life insurance policies, like adjustable life insurance, can have a premium structure that may increase or decrease throughout the life of the plan. These are some of the many policy features that you can choose when deciding what the best life insurance policy is for you. For example, an adjustable plan would make sense if you know you may have changing coverage needs in the future.
1: Cash value account: As a form of permanent life insurance, straight life insurance comes with a cash value account that will grow over the life of the plan. The cash value component of a life insurance policy is separate from the death benefit. Each month, part of the premium that you pay for a straight life policy will be added to the cash value account. The rest of the premium goes towards the company’s costs for providing insurance.
The cash value is basically an investment account inside of your straight life insurance policy. This account will grow according to a guaranteed rate over the course of the policy length. The rate of return will typically be large enough that when you turn 100 the cash value account will equal the value of the death benefit. At any point, you can use the cash value account for a variety of reasons, including:
- Surrender Value – If you decide that you no longer want your policy, you can return it to the insurer and in return you will receive the cash value back.
- Loan Collateral – You can ask for a policy loan from your insurance company and use your cash value account as the collateral. The maximum you could borrow would be equal to the total value of the cash value in your life insurance policy.
Simply put, the cash value represents the amount of money invested in your life insurance policy. This balance can be used in a variety of ways, but if you remove money from the policy it will subsequently be deducted from your death benefit.
How Does Straight Life Compare to Other Types of Insurance?
The reasons people buy life insurance are usually the same: they’re looking for a way to protect their family from unexpected loss or hardship, or they want a secure and private way to grow and protect their wealth. In the case of permanent life insurance, people want both. It’s important to know why you’re buying life insurance and what your financial goals are. This determines what type of insurance is right for you.
Straight Life vs. Term Life Insurance
Term life insurance is typically purchased in five-year increments, for up to 30 years of coverage. If you die during your covered term, the insurance company pays out a death benefit to your beneficiary. If you outlive your covered term, neither you nor your beneficiary receive anything.
Premiums are typically much cheaper than a straight life policy because this type of insurance usually only sees a pay out in the event of an accident or unexpected terminal illness. The typical candidate for term life insurance is usually looking to cover the costs of debt, like college tuition or a mortgage they’re responsible for paying, that would be a hardship on their spouse, child, or other family member if the policyholder passed away unexpectedly.
Term insurance does not have a cash value component, or any other living benefits for the policyholder. If you think you may want the benefits and growth of a straight life policy, but are concerned about premium costs, a convertible term policy might be right for you. With convertible term, you get the temporary coverage of term life insurance now, but are able to “roll over” your coverage into a straight life policy at a later date (usually within 10 years) without needing an additional medical exam to qualify.
If you purchase term life insurance outside of a convertible policy and decide you need more coverage at a later date, the cost of your premium is likely to increase. Premiums are based off of your health, which tends to deteriorate with age. This is why it’s important to get the right insurance coverage for your needs as early as possible.
Straight Life vs. Universal Life Insurance
Universal life insurance shares some similarities with straight life insurance. Both will pay out a death benefit to the policyholder’s beneficiary for life, so long as the premiums are paid. Both have cash value components and can grow your wealth over time. But there are a few big differences between straight life and universal life.
The interest you earn in a straight life policy is guaranteed, plus you can earn non-guaranteed dividends. Universal life policies don’t have guarantees. The interest you earn varies from year to year, and in different ways, depending on if you have traditional universal, indexed universal, or variable universal insurance. If you are planning on using the cash value of your policy for retirement, you might prefer to know exactly how much you’ll have to spend; universal life won’t offer you that peace of mind.
The cash value of a universal life policy can also have an effect on the policy premium. Universal life policies have variable premiums, and you can decrease the amount you pay, or possibly skip a payment, if you have sufficient cash value accumulated. However, decreasing your premium can mean a decrease in coverage, leaving your beneficiaries with an insufficient death benefit. There is also a very real possibility that your premium will go up over time.
A straight life policy has a level premium—it won’t change over the life of your policy. In fact, when dividends accumulate over time they can be used to cover premiums, effectively lowering your out-of-pocket cost to net zero in later years. This level of certainty can be helpful in financial planning for your future.