Whole Life Insurance

Man on top of mountain. Conceptual scene.

Whole life insurance is exactly what it says – it is your lifetime protection that has no term or age limit. Whole life insurance policy does not expire. This plan remains in force unless you stop paying the premiums. Whole life insurance or permanent life insurance is most often bought with long-term goals in mind i.e. estate planning and investment purposes. It guarantees invariable premiums and cash value accumulation.

Understanding Whole Life Insurance

Whole life insurance policies have several facets and offer many options. Some life insurance companies often explain whole life as a “death benefit with a savings component”. Although application requirements differ from one insurance provider to another, it is usually necessary for applicants to undergo a medical examination.

Whole life insurance typically requires that the owner pay premiums for the life of the policy or . There are some arrangements that let the policy be “paid up”, which means that no further payments are ever required, in as few as 10/15/20 years, or with even a single large premium. Typically if the payer doesn’t make a large premium payment at the outset of the life insurance contract, then he is not allowed to begin making them later in the contract life. However, some whole life contracts offer a rider to the policy which allows for a one time, or occasional, large additional premium payment to be made as long as a minimal extra payment is made on a regular schedule. In contrast, universal life insurance generally allows more flexibility in premium payment.

“You don’t buy insurance because someone may die; you buy it because families and people keep on living, don’t you? (Carlos Banhelyi)”

Whole life insurance provides lifetime death benefit coverage for a level premium in most cases. Premiums are much higher than term insurance at younger ages, but as term insurance premiums rise with age at each renewal, the cumulative value of all premiums paid across a lifetime are roughly equal if policies are maintained until average life expectancy. Part of the insurance contract stipulates that the policyholder is entitled to a cash value reserve, which is part of the policy and guaranteed by the company. This cash value can be accessed at any time through policy loans and are received income tax free. Policy loans are available until the insured’s death. If there are any unpaid loans upon death, the insurer subtracts the loan amount from the death benefit and pays the remainder to the beneficiary named in the policy.

The advantages of whole life insurance are guaranteed death benefits, guaranteed cash values, fixed, predictable annual premiums and mortality and expense charges that will not reduce the cash value of the policy.

New type of Whole Life Insurance is a combination of all guaranties of Whole Life Insurances and Long Term Care Benefit in one policy.

The disadvantages of whole life insurance are inflexibility of premiums and the fact that the internal rate of return in the policy may not be competitive with other savings alternatives. The death benefit can also be increased through the use of policy dividends, though these dividends cannot be guaranteed and may be higher or lower than historical rates over time. According to internal documents from some life insurance companies, the internal rate of return and dividend payment realized by the policyholder is often a function of when the policyholder buys the policy and how long that policy remains in force.

Whole Life Insurance vs. Term Life Insurance

All life insurance was originally temporary (term) insurance. However, because term life insurance only pays a claim upon early premature death within the stated term, a number of term insurance policy holders became upset over the idea that they would most likely be paying premiums for 20 or 30 years and then wind up with nothing to show for it. Temporary insurance only pays out 2-3% of the time. This has become known as the “Lost Opportunity Cost” called term insurance.
In response to market pressures, actuaries produced an insurance policy with level contributions that would last a lifetime. These contracts would offer a “cash value” that would build up against the fixed claim – the death benefit. These policies would also credit guaranteed interest to the cash value account. The cash value would increase as long as the policyholder lived, gradually approaching the death benefit with time. Upon maturity of the contract (usually at age 95 or 100), the cash value would equal the death benefit. The policyholder could at any time opt out and receive the cash value. By guaranteeing the death benefit, the policy owner was assured that insurance coverage would be in force when the insured died, allowing them to unlock and exploit other assets. Upon the death of the insured, the cash value would be surrendered to the insurance company and the beneficiary would receive the death benefit. If, before the death of the insured, the policy owner wished to take the cash value and forfeit the death benefit, the cash value would be paid back with interest minus dividends paid.

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