Business Glossary

innovation in life insurance that allows policyholders to invest the cash value of the policy in stock, bond, or money market portfolios. Investors can elect to move from one portfolio to another or rely on the company's professional money managers to make such decisions for them. As in whole life insurance, the annual premium is fixed, but part of it is earmarked for the investment portfolio. The policyholder bears the risk of securities investments, meaning that cash values and death benefits will rise if the underlying investments do well and fall if the investments drop in value. Some insurance companies guarantee a minimum death benefit for an extra premium. When portfolio investments rise substantially, policyholders can use a portion of the increased cash value to buy additional insurance coverage. Policyholders can borrow against the accumulated cash value or cash in the policy. As in an Individual Retirement Arrangement, earnings from variable life policies are tax deferred until distributed. Income is then taxed only to the extent it exceeds the total premiums paid into the policy. Death benefits are not taxed as individual income but as taxable estate income, which carries an exclusion of $2 million, rising to $3.5 million in 2009.

Variable life insurance is different from universal life insurance. Universal life allows policyholders to increase or decrease premiums and change the death benefit. It also accrues interest at market-related rates on premiums over and above insurance charges and expenses.

form of life insurance policy that offers protection in case the insured dies and also builds up cash value. The policy stays in force for the lifetime of the insured, unless the policy is canceled or lapses. The policyholder usually pays a level premium for whole life, which does not rise as the person grows older (as in the case of term insurance). The earnings on the cash value in the policy accumulate tax-deferred, and can be borrowed against in the form of a policy loan. The death benefit is reduced by the amount of the loan, plus interest, if the loan is not repaid.

Traditionally, life insurance companies invest insurance premiums conservatively in bonds, stocks, and real estate in order to generate increases in cash value for policyholders. Policyholders have no input into the investment decision-making process in a whole life insurance policy. Other forms of cash value policies, such as universal life insurance and variable life insurance give policyholders more options, such as stock, bond, and money market accounts, to choose from in investing their premiums. Whole life insurance is also known as ordinary life, permanent life, or straight life insurance.

policy combining features of universal life insurance and variable life insurance in that excess interest credited to the cash value account depends on investment results of separate accounts (equities, bonds, real estate, etc.). The policyowner selects the accounts into which the premium payments are to be made. However, since this is an equity product, filing with the Securities and Exchange Commission (SEC), an annual prospectus, an audit of separate accounts, and agent registration with the National Association of Securities Dealers (NASD) are required. This policy can be considered a replacement for universal life insurance when interest rates of U.S. Treasury issues and other money market instruments are low. Contrast with universal life insurance.