Ordinary, or whole life insurance, pays the face amount to your beneficiary when you die. You can name anyone, even a trust, as a beneficiary. Tax consequences to the beneficiary vary, depending upon who the policy owner is. See Estate Planning for information on estate planning and tax consequences for various assets.

Defining Ordinary Life Insurance
What makes ordinary life insurance different from term life insurance? An ordinary life insurance policy is a combination of a term insurance policy and a “savings account.” The policy owner pays a level premium, which is usually higher in the early years, and excess amounts are used to fund the savings account (also known as the cash value). Ordinary life insurance allows the policy owner to choose one of the following options, even if the insured doesn't die.

• receive some of the premium back in the form of a low-cost policy loan
• surrender the policy for cash
• receive a reduced life insurance benefit at death
• continue the current life insurance benefit for a reduced time period

Types of Ordinary Life Insurance

Ordinary Life Insurance. An ordinary life insurance policy combines the term life insurance policy with the savings account where the cash value grows based on a set interest rate. Most insurance companies will provide a minimum (or guaranteed) interest rate and a “current” (usually higher) interest rate. Be careful of the guaranteed and current interest rates because if they are under today’s inflation rate, you will ultimately be losing money.

Universal life insurance. You can pay either a full premium that includes the savings portion, or only the minimum required to pay the death benefit. If you also pay for the savings element, then you can miss some premium payments in the future and still keep the policy in force.

Eventually, however, the savings portion can run out, and you must then pay the minimum premium for death protection to keep the policy in force. Generally, universal life insurance pays a higher interest rate on the savings element than ordinary life policies pay, but not necessarily in times when interest rates on government and highly rated corporate bonds are low.

Universal life insurance offers the possibility of a larger death benefit than that available with whole or ordinary life insurance. The savings element can be added to the face amount as an additional death benefit at the death of the insured. The cash value savings portion of whole or ordinary life insurance pays only the policy's original face amount, which includes the savings portion.

Variable Universal Life. Variable universal life has many of the same characteristics as the universal life policy, including additional death benefits from the savings portion when the insured person dies. Instead of guaranteeing a minimum interest rate on the policy's savings portion, it is invested in the stock market. While it is unlikely that an insurer selling this type of policy would allow all of its stock market investments to lose all their value, there is the possibility that it could happen, and this would affect the final death benefit payable to a beneficiary.

Over a long period of time, investments in the stock market will likely exceed the value of fixed-dollar investments like bonds, mortgages, and money-market funds. That makes the death benefit potentially more from a higher savings element of the variable universal life insurance over straight universal or ordinary life insurance. This type of policy is not recommended, however, if you want to guarantee a specified death benefit for your heirs.

Death Benefit At Low Cost
You'll want to get a guaranteed death benefit at the lowest cost possible. That usually means buying term life insurance. If you can afford to buy the amount of insurance you need by buying one of the ordinary life alternatives with a savings element described above, look into several insurers and compare their premiums and their cash values after 10 and 20 years.

CAUTION: most life insurance agents will push ordinary life insurance because of the high commissions they receive from your premiums. Before signing any life insurance policy, discuss with your local JAG or a First Command representative. Of all things, ask questions if you do not understand the policy.