What is Whole Life Insurance
Whole life insurance is permanent insurance. It is designed to provide insurance coverage for the life of the insured. Provided premiums are paid according the contract, a whole life insurance policy remains in force until it matures. Maturity most often occurs when the death of the policyholder triggers the death benefit that is paid to the beneficiary. Whole life insurance also features a cash-building component. A portion of the premium is applied to cover the cost of providing the life insurance while the other portion is invested in an effort to increase tax-deferred growth. Whole life insurance policies, then, are part insurance product and part investment product.
Whole life insurance premiums can be much higher than those for other types of insurance, such as term life or universal life. However, a life-long whole life policy, particularly one that is purchased early in life, can be far more cost effective than a term policy that is renewed at the end of each term. This is simply because it costs more to insure an older person than it does to insure a younger person. Insurance companies are in the business of managing risk. And from their perspective, the probability of paying a death benefit is more likely with an older person than it is with a younger person.
Type of Whole Life Policies
While policies vary among insurance companies and states, there are six different types of whole life policy:
A Participating Whole Life Policy
The premiums for a participating whole life policy are usually the most expensive as this type of policy pays a dividend. The dividend is the policyholder’s share in the profits of the insurance company. In a sense, a participating whole life policyholder is a shareholder in the company, just as he or she would be if stock were owned. The dividend can be taken in cash, used to reduce the premium or purchase additional coverage or set aside and paid a rate of interest as specified in the contract. As profits cannot be guaranteed from year to year, neither is a dividend guaranteed.
A Non-Participating Whole Life Policy
A non-participating whole life policy has a set premium that is due and a set face value that remains level during the life of the policy. This type of policy does not pay a dividend. The premiums are less expensive than those of a participating policy.
A Level Premium Whole Life Policy
With a level premium policy, premiums remain the same as long as the policy is in force. However, during the first several years of the policy, the premium is more than sufficient to cover the insurance company’s cost of providing the insurance. The balance, along with any earnings credited, make up the difference in providing the coverage in later years, when the premium does not cover the cost of the insurance.
This additional money is invested by the insurance company and is what creates the cash value of a whole life policy. The principle of premium cost with this type of policy is again that it is less expensive to insure a younger person than it is to insure an older person. As with any type of level premium policy, the amount of the premium and what it covers while the policy is in force changes over time.
A Limited Payment Whole Life Policy
The limited payment option allows the policyholder to pay premiums for a limited amount of time, as defined by the policy. But, the premiums for this type of policy are usually much higher than a traditional whole life policy as they are paid over a reduced amount of time. In other words, all underwriting criteria being equal, the total amount of premium due on a traditional whole life policy and a limited payment policy is the same, it’s just paid over a different length of time. This can be an option for those who need permanent coverage for life but want to limit the number of premium payments.
A Single Premium Whole Life Policy
A single premium whole life policy is purchased with one lump-sum payment. This kind of policy has immediate cash value and can be loaned back to the policyholder or used as collateral for a loan. A single premium policy is more investment oriented than other types of whole life policies. It is most often used for estate planning and inheritance purposes.
An Intermediate Premium Policy
The premiums in an intermediate whole life policy are adjustable. The cost of managing whole life policies is called the earning, mortality, and expense costs. The insurance company estimates this management expense and includes it in the premium. If it changes in the later years of an intermediate premium policy, the charge is adjusted either up or down, but cannot exceed the guaranteed maximum.
Surrendering a Whole Life Policy
Most insurance companies allow for the surrender of a whole life insurance policy prior to the death of the policyholder. Usually, however, the policy must be in force for a minimum number of years before it can be surrendered for any portion of the cash value. Even then, the entire cash value of the policy may not be available to the policyholder. When a whole life policy is surrendered, the policyholder receives the cash value of the account less any surrender fees, loans outstanding and premiums that have not been paid.
Because of the higher premium amounts and the discipline required to make the premium payments on schedule, a whole life policy is almost always better suited for older individuals and established families. Those with a substantial and reliable income who need permanent life insurance protection combined with the additional benefit of building cash assets are also suited to whole life insurance. Parents who waited until later in life to have children or those with dependant adult children may look to a whole life policy as an estate-planning tool or even as a way to provide a charitable gift.
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