Whole Life Insurance Policies
Life insurance policies fall into two categories: Term and permanent. Term life insurance policies are purchased for a specified amount of time. The term can range from as few as two to as many as 30 years, depending on the age of the insured. Permanent policies, on the other hand, are purchased to cover the insured for his or her entire life. Whole life insurance policies are a type of permanent life insurance. That is, they cover the insured for his or her “whole” life.
Permanent life insurance policies have what is known as a “cash building” feature. The premium that is paid by the owner of the policy is applied toward two separate parts of the policy. The first part is applied to an investment account that grows tax-deferred. The second part of the premium covers the death benefit that is paid to the beneficiary upon the death of the policy owner.
Types of Whole Life Insurance Policies
While the types of whole life insurance policies will vary based on the insurance company underwriting the policy and the state in which the policy is sold, whole life insurance policies generally fall into six main categories:
This is the most expensive type of whole life policy as it pays a dividend based on the performance of the insurance company. The dividend, which represents the policy owner’s share of the profits, can be taken as a cash payment, used to reduce the amount of premium that is due or placed in a separate account on which interest can accrue. Those considering whole life policies should be aware that profits, and therefore dividend distributions, are not guaranteed from year to year.
A non-participating whole life policy does not “participate” in the profits of the insurance company. Therefore, the premiums are less expensive than those of a participating whole life insurance policy.
With most other insurance policies, including term and permanent policies, the premium paid to the insurance company increases as the policy owner ages. With a level premium whole insurance policy, the premium remains level, or the same, for as long as the insured maintains the policy.
The amount of the premium reflects the cost to the insurance company to provide the insurance. During the first years of the policy (the exact number of years depends on the age of the policy owner at the time he or she purchases the policy) the premium is usually enough to cover the insurance company’s cost of providing the life insurance. The remaining portion of the premium, along with interest that is credited over the years, makes up the shortfall of the cost of providing the insurance in later years.
Limited payment whole life insurance policies reduce the length of time the premiums are made. Instead of paying the premiums every month or every year for permanent coverage, the policy owner pays for a set period of time. As one would expect, the premiums for this type of whole life insurance policy are higher than other types.
Single premium whole life policies are bought with one payment. This type of policy is often purchased instead of an immediate annuity, as it can be used for estate planning purposes.
An intermediate premium policy features adjustable premiums. The cost to the insurance company for policy management is represented as the “earning, mortality and expense” fee. Depending on the companies earnings, the number of policies that mature and the cost of managing the investments, this fee can change from year to year. This change, either up or down, is reflected in the premium of an intermediate premium policy.
Companies That Offer Whole Life Insurance Policies
Almost all life insurance companies offer whole life policies. Some of the largest and most well known companies are Metropolitan Life (MetLife), New York Life, Prudential and USAA. MetLife and Prudential are publicly traded. That means that while each company has a chief executive officer and a board of directors, each is owned by shareholders. New York Life and USAA, however, are mutual companies. While they, too, have a chief executive officer and a board of directors, the policyholders own the companies.
When in the market for a whole life insurance policy, buyers are advised to make sure that the agent from whom they wish to buy the policy is licensed in the state in which the policy is sold. Additional requirements, such as specific certification and training may be required by the state. If the agent is also selling financial products, such as variable annuities, he or she must be registered with the National Association of Securities Dealers (NASD).
Growth and Surrender of Whole Life Insurance Policies
Whole life insurance policies are often used as investment vehicles as well as insurance policies. Because the earnings on a whole life policy grow tax-deferred, taxes are not due until distributions are taken on the cash portion of the policy. In this way, a whole life policy functions much like an annuity.
However, the death benefit on a whole life policy is almost always paid to the beneficiary tax-free. For families with significant wealth, the estate can use the tax-free death benefit to cover inheritance taxes or any other expenses.
Most insurance companies will allow the policyholder to surrender a whole life insurance policy. Policyholders should note, however, that insurance companies almost always require that the policy be in force for several years before it can be surrendered for any part of the cash value that has built up. Unlike other investments, the vesting schedule for a whole life policy can be extremely long.
Even if the policy has been in force for a number of years, the surrender value may be significantly less than the cash value. In addition, surrender fees and any outstanding loans taken against the policy will be deducted from the amount returned. For this reason, those who chose to purchase whole life insurance policies are always advised to carefully balance their insurance needs against their investment needs.
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