Whole Life Insurance

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A whole life insurance policy is designed to provide insurance protection for the whole of life (i.e. from the date of issue until the death of the insured) as long as the premiums are paid. It not only provides insurance protection, it also accumulates cash value.

A whole life insurance policy is designed to mature (‘endow’) when the insured reaches the age of 100. If the policyowner pays every premium from the date of the policy issue until he/she attains the age of 100, the policy would be fully paid-up (the cash value would equal the face value) and premium payments would cease. If the policyowner dies during the term of the policy, the insurance company will pay the face amount, which includes the cash value.

Although the primary purpose for purchasing a whole life policy is for the death benefit to provide security for those you love, etc., whole life policies have other outstanding benefits as well. These are:

the death benefit paid to the beneficiary is free of income tax;
the policyowner can borrow from the cash accumulation within the policy; and,
the money taken out as a loan is not subject to income tax whether or not the loan is repaid.

The policy face value and premium rates are set at the issue date and remain level for the term of the contract. During the early years of the policy, the policyowner is younger and, because of the level premium rates, an more premium is paid in the early years than is required to fund the insurance. By guaranteeing an interest rate for those funds, the policy earns cash value at a rate designed to endow by the time the policyowner reaches the age of 100. Because very few people live to be 100, the whole life insurance policies will most likely either be surrendered for the cash value or the death benefit will be paid when the policyowner dies.

Since the policy has cash value, the policyowner can borrow the funds by paying a low interest rate. If an outstanding loan is not repaid at the time of death of the policyholder, the beneficiary would receive the face amount less the amount of the outstanding loan and any unpaid interest due on the loan. However, if the policy lapses for failure to pay the premiums or is surrendered, any outstanding loan is considered a taxable gain. Care must be taken to not over-borrow from the loan and to leave enough cash value in the policy to sustain the policy if the insured lives to an old age. Additionally, the policy itself, since it has value and is considered property, can be used as collateral or security for loans.

Death benefits are paid to the beneficiary free of income taxes. Life insurance is the only plan that can make this guarantee.

The basic forms of whole life insurance policies are:

straight whole life – provides a fixed face value and level premiums until the policyowner reaches the age of 100 or dies during the policy years.
limited pay whole life – the face value stays the same and the insurance protection extends until death or the age of 100; however, the premiums can be paid for a specific period of time or to a specific date (e.g., the 65th birthday of the policyowner) to fully pay the policy.
single premium whole life – policyowner can make a single large one-time premium payment at the beginning of the policy period to fully pay the policy. This policy will have immediate cash value and allow the policyowner to borrow from the policy at a low interest rate.
Note – to avoid becoming a Modified Endowment Contract there are certain rules and tests limited pay and single premium policies must follow.
modified whole life – premiums are generally lower in the first years of the policy and higher in later years. This is designed for persons with limited financial resources but have the promise of higher resources in later years. The total over the period of the policy would be equivalent to the straight whole life policy.
graded premium life – premiums are lower in the initial period and gradually increase before leveling off for the duration of the contract. Again, the total over the period of the policy would be equivalent to the straight whole life policy.
Other policies include minimum deposit whole life, indeterminate premium whole life, enhanced whole life and indexed whole life.

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This material contains only general descriptions and is not a solicitation to sell any insurance product or security, nor is it intended as any financial or tax advice. For information about specific insurance needs or situations, contract your insurance agent. Our articles are intended to assist in educating you about insurance generally and not to provide personal service. They may not take into account your personal characteristics such as budget, assets, risk tolerance, family situation or activities which may affect the type of insurance that would be right for you. In addition, state insurance laws and insurance underwriting rules may affect available coverage and its costs. If you need more information or would like personal advice you should consult an insurance professional. You may also visit your state’s insurance department for more information.