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Straight life insurance is a policy that provides lifelong life insurance coverage with continuous level premium payments. Also known as whole life insurance, a straight life policy has a cash value account that grows in size as you contribute premiums to the plan. Straight life policies are often expensive and therefore are not recommended for short-term life insurance coverage.
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.
What type of premium does a straight life policy have?
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.
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.
Pros and cons of straight life insurance
A straight life policy can be a valuable life planning tool if you need long-term financial planning. Since the policy is designed to last your entire life, you will be able to maximize the cash value by holding onto the plan for a longer period. Straight life will not work well for short-term needs since it will often take decades before you will see reasonable investment returns from the cash value account.
Finally, straight life insurance is significantly more expensive than premiums for a term life insurance plan. For example, the average cost of a 20-year $100,000 term life insurance policy is $199 per year. When comparing this to whole life insurance, which can have premiums over $1,000 per year for a policy with $100,000 in coverage, it shows significant cost considerations between both policies. Therefore, if you need life insurance for periods shorter than 20 to 30 years we would recommend a term policy.
Along with term life insurance, a guaranteed universal life policy is another cheap life insurance option to consider as well as being very easy to apply and be approved for. This policy is a form of permanent life insurance coverage which has a cash value account which is guaranteed to no go below zero. Thus, it can be a good solution if you want lifelong coverage without the need for the cash value account or are not certain about whether you need permanent or term life insurance. Additionally, guaranteed universal life can be considerably cheaper when compared to other permanent policies.