Types of Whole Life Insurance

Overview

The two major categories of whole life insurance: non-participating and participating policies, defined by whether or not the cash value receives dividends from the life insurance company. Within these categories, there are several variants of whole life policies, including level premium, limited payment, single premium, indeterminate premium, whole life economic, and interest sensitive whole life insurance.

The various types of whole life insurance offer different levels of financial risk, different payment arrangements, and different levels of coverage.

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Non-participating Whole Life

This is the simplest and lowest-cost form of whole life insurance. It includes a fixed death benefit, a guaranteed cash value, and level premiums over the course of the policyholder’s life. “Non-participating” means that the policyholder’s account does not participate in the investment activities of the life insurance company – if the insurance company’s actuarial estimates are overly optimistic (resulting in insufficient funds to pay claims and benefits to policyholders), the insurance company will pay the difference to the policyholder. A non-participating whole life insurance policy is a low risk proposition for policyholders – but that also means that there is little potential for growth.

Participating Whole Life

This form of whole life insurance offers the policyholder a chance at higher growth in the cash value of the policy, as this type of whole life insurance is eligible for dividend payments from the insurance company. If the insurance company’s investments perform well, the participating whole life insurance accounts are able to receive additional cash payments as a result. Participating whole life insurance plans often cost more than non-participating policies because of the possibility of additional growth. However, dividends are not guaranteed – in exchange for the possibility of greater reward, policyholders also have to accept the risk that their insurance company will not be able to pay out as much as expected to add to the cash value component of their account.

Level Premium Whole Life

This is one of the most common forms of whole life insurance. The premiums are calculated based on the full duration of the policyholder’s life (up to age 95 or 100), and the policyholder pays an equal premium amount each month, every month, for the rest of his/her life. The advantage of level premium whole life insurance is that it gives the policyholder convenience and stability in knowing exactly how much money will be owed on the premium each month – and the premiums are guaranteed to never increase.

Limited Payment Whole Life

Some policyholders would rather not have a monthly premium payment for the rest of their lives; in this case, limited payment whole life insurance is a good alternative. With this type of policy, the policyholder can choose to pay the full premium in a much shorter timeframe – for example, in 10 or 20 years. This results in the long-term stability of knowing that the life insurance policy is paid off and cannot be voided. However, one drawback is that the premium payments are higher than level premium plans, because of the compressed payment schedule.

Single Premium Whole Life

With single premium whole life insurance plans, the policyholder pays the full amount of the policy premium up front, in one large payment. This type of whole life insurance is most often used as an investment, since buyers need to have a large amount of cash on hand in order to make the payment.

One advantage is that the policy is immediately paid in full and has a substantial cash value that can be borrowed against (or left to grow tax-deferred). A drawback of the single premium plan is that these plans often have significant fees that policyholders have to pay if they surrender their policies during the first few years.

Indeterminate Premium Whole Life

Instead of making the same premium payment each month, the indeterminate premium plan allows policyholders to pay a variable amount depending on the insurance company’s financial performance and actuarial projections.

The advantage is that if the insurance company is performing well and not experiencing heavy losses from claims, the policyholder can benefit from paying a lower-priced premium. The drawback is that there is also a chance that the policyholder’s premiums could go up – although the payments cannot exceed a maximum value as agreed upon in the policy.

Whole Life Economic

This is a type of participating whole life insurance where the plan’s dividends are automatically used to buy additional term life insurance. The advantage of the whole life economic plan is that the policyholder receiving additional death benefit as time goes by. One drawback to this plan is that if the insurance company’s investments do not perform well, the policyholder’s death benefit might actually shrink over time.

Interest Sensitive Whole Life Insurance

This is a fairly new type of whole life insurance that combines elements of whole life and universal life insurance. The interest on the policy’s cash value fluctuates according to market conditions – there is the potential for higher growth, but also the risk of lower gains. The death benefit is constant for life, and the premium can vary, but cannot go higher than the maximum premium guaranteed in the policy. This is a good option for policyholders who want the security of a guaranteed death benefit, while also having the opportunity for higher gains in their cash value.

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