Define Whole Life Insurance
To define whole life insurance, one first needs to define permanent life insurance. A permanent life insurance policy is one that is in force permanently. Whole life is often defined as insurance that is in effect for a person's "whole life". This is unlike term life insurance, which is temporary insurance. Like all life insurance products, whole life insurance represents a contract between the insured and the insurance company. In exchange for the premiums that are paid by the insured, the insurance company agrees to pay the beneficiary upon his or her death. The amount of the death benefit of a whole life policy depends on the face value amount and the type of policy chosen.
Whole life insurance is often best suited for those who can commit to paying the premiums according to the contract and who are not at risk for surrendering the policy prematurely. Life insurance agents often define whole life insurance as suitable for older couples or business owners who need to protect assets as well as income. For example, a couple with significant assets – equities, bonds, property and cash – may choose a whole life policy so their children will have enough cash to pay estate and inheritance taxes without having to sell any of the assets. A business owner may name his or her business partner as beneficiary so that the partner will have enough cash to buy the deceased partner's share of the company.
How to Define the Type of Whole Life Insurance Policies
Whole life insurance policies are relatively versatile insurance products. They are structured in a way that usually accommodates the insurance and investment needs of the policy owner. There are six basic types of whole life policies. Each has strengths for an individual's portfolio based on his or her unique insurance and investment needs.
Participating Whole Life Policy
The definition of a participating whole life policy is one that participates in the earnings of the life insurance company. In other words, it pays a dividend. The insured is considered a part owner in the company, just as he or she would be if he or she owned the company's stock. The insured can opt to take the payment as cash, use it to pay the premium or contribute it to the investment portion of the policy.
Non-Participating Whole Life Policy
A dividend is not paid on a non-participating policy. As one would expect, the premiums on a non-participating policy are less than those on a participating policy.
Level Premium Whole Life Policy
The premiums paid on a level premium whole life policy remain level for as long as the policy is in effect. Whether premiums are paid monthly, quarterly or annually, they are always the same.
Limited Payment Whole Life Policy
Instead of paying premiums for life, a policyholder who chooses a limited payment policy pays premiums for a set amount of time. The amount of time is generally a certain number of years.
Single Premium Whole Life Policy
A single premium whole life policy is defined as one that is purchased with one single payment, instead of one that is purchased by paying premiums over the life of the contract or for a limited time. A single premium policy is often used as an investment strategy or as a way to save additional tax-deferred money for retirement. In addition, because most states recognize insurance policies as irrevocable contracts between the policy owner and the insurance company, the money invested cannot usually be attached as part of a lawsuit.
Intermediate Whole Life Policy
The definition of an intermediate whole life policy is one that offers flexible premiums. A policyholder can choose among a number of options including increasing or decreasing premiums or paying the premiums out of the cash account.
Define Whole Life Insurance Compared to Term Life Insurance
As discussed earlier, whole life insurance is permanent insurance that is in effect for a person's entire life. As long as he or she pays the premiums according to the contract, the policy will remain in force. Term life insurance, on the other hand, is temporary insurance. It is only in force for the length of the term. The contract for the term can be as short as one year or as long as 20 years.
Whole life insurance offers several advantages over term insurance. First, it has a cash-building component. Whereas the premium of a term policy is applied only toward the death benefit, part of the premium paid on a whole life policy is applied to the death benefit and part is applied toward the cash-building component. The cash in the account, regardless of how it is invested, grows tax-deferred. Second, a whole life policy builds equity. A single premium policy has immediate equity. Term life insurance has no investment option and does not build equity. Finally, whole life insurance can be used for a number of different financial and insurance objectives.
Define Whole Life Insurance for Suitable Applicants
Whole life insurance policies are often purchased as part of a retirement plan in place of immediate or deferred annuities. While both offer the advantages of tax-deferred growth, whole life insurance provides the added security of the death benefit. Those who purchase whole life policies are cautioned, however, to ensure that named beneficiary is a spouse, family member, business partner or charity and not the estate.
When the beneficiary is a person, or even a charitable organization, the death benefit does not go through probate. It is paid to beneficiary very soon after the claim is filed. If the beneficiary is the estate, the death benefit is paid to the estate and is subject to any and all state and federal inheritance taxes.
There is no limit to the number of whole life policies an individual can own. Whether the policy is purchased primarily for insurance or investment needs, a whole life policy can often suit the specific needs of the insured.
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