There are many reasons to purchase life insurance coverage – both personal and business. For most people, however, the key purpose is to protect other individuals or entities from a financial loss in the event of death.
When seeking out the type of coverage to purchase, there are essentially two primary categories that life insurance falls into. These include term and permanent. Term life insurance is considered to be the most basic form of life insurance coverage on the market. It consists of pure death benefit protection, with no additional cash value or investment component. This is why term life is typically the most affordable form of life insurance to purchase – especially for those who are young and in relatively good health, though there are no medical exam term life insurance policies out there, if that is needed.
Permanent life insurance policies have two parts – a death benefit and a cash value portion. These types of policies offer an insurance component that pays a stated amount of proceeds upon the death of the insured. It also offers a cash value portion that accumulates cash that can be used by the policy holder to withdraw or borrow against. The most basic form of permanent life insurance protection is whole life.
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How It Works
Whole life is a type of permanent life insurance plan that are intended to stay in force throughout the “whole” life of the insured, or until the policy pays out. It is the simplest form of permanent life insurance available.
One reason that whole life is attractive for policy holders is that the premium remains the same throughout the entire life of the policy. While whole life insurance premiums may initially be higher in comparison to a term policy with the same face amount. As the insured ages, the premiums will not increase. Whole coverage may also be referred to as ordinary life or straight life insurance.
Whole life insurance policies contain two primary components. These include a death benefit and a cash value component. The death benefit can be a set amount, or conversely it can increase over time. (An increase in the policy’s death benefit could cause premiums to increase).
The cash value component will typically contain two separate elements. One is the actual cash that grows on a pre-determined basis during the life of the policy.
Initially, the cash value in the policy grows slowly. This is due in large part to the fact that a majority of the early premium goes towards paying the agent’s commission, as well as other fees. Over time, however, the whole life policy cash value will steadily grow – in most cases based on a minimum guaranteed rate of return.
As it continues to grow, this portion of the cash value will eventually “endow,” or become equal to the amount of the policy’s death benefit upon maturity of the policy. This is typically when the insured reaches the age of 100.
In some cases, policies may also offer a non-guaranteed cash value element that is made up of policy dividends or excess interest. The combination of the general cash value portion with the non-guaranteed cash value build up can enhance the value of the policy over time.
A whole life policy’s cash value can typically be accessed at any time by the policy holder through withdrawals or policy loans. Paying back the loan is optional. However, any portion of the loan that is not repaid at the time of the insured’s death will decrease the amount of death benefit that the policy’s beneficiary receives.
Types of Whole Life Insurance Policies
There are different types and variations of whole life insurance that are available in the market place today. These include:
- Participating – A participating policy will share the insurance company’s excess profits with their policy holders. This is most often done by providing dividends. The policy holder will not be taxed on the dividend because they are considered to be a return of a portion of the policy’ premiums.
- Non-Participating – With a non-participating policy, the insurance company will assume all risk of future performance. This means that if the cost of future claims has been underestimated by the insurer’s actuaries, the insurance company will need to make up the difference. If, however, the cost of the insurer’s future claims has been overestimated, then the insurance company may keep this difference. Non-participating policies do not pay dividends to their policy holders.
There are several benefits to owning a whole life insurance policy. First, although the premium may start out higher than term insurance premiums for the same amount of coverage, the premiums on whole life stay level throughout the entire life of the policy. This makes the policy much easier to budget for over the long term.
Whole life insurance also offers a minimum guaranteed death benefit. Since those insured by whole life never have to requalify, they can count on a specific amount of death benefit for their survivors at a premium that never changes.
Certainly another benefit is that they build cash value. And, this savings element allows insureds to build cash value on a tax deferred basis. In addition, the policy owner can cancel or surrender the whole life policy at any time and receive the accumulated cash value.
If an insured owns a participating whole life policy, they have the opportunity to earn dividends. These dividends provide many advantages, including additional cash value or increased death benefit.
Whole life insurance policies also offer the opportunity for additional retirement assets. For example, the insured can convert their cash value to a fixed annuity and use the income for retirement, or they can cash out and use the money for emergency funds or other bills.
Whole life insurance policies can also be identified by their method of payment. Various whole life payment methods can include:
- Straight / Level – The majority of whole life insurance policies are straight life. This means that the premium payments will continue to be due until the insured reaches age 100, or passes away. Straight whole life may also be referred to as pure or continuous whole life.
- Limited Pay – A limited pay policy allows the policy holder to pay for the entire policy over a set period of time. For example, a 10-pay policy would set the premiums so that the policy would be completely paid up after 10 years. After that, the policy holder would owe no more premium. These policies are designed for those who want the permanent life insurance protection of whole life, but do not want to pay premiums indefinitely. These types of policies will also have a higher amount of initial cash value. This is because each premium payment that is made is higher than the premium amount on a straight life policy. Therefore, the cash component of a limited pay whole life policy will also typically accumulate more rapidly than that of a straight life policy as well. A limited pay policy will still endow when the insured turns age 100.
- Single Premium – Single premium whole life policies are considered to be “paid up” after the policy holder pays just one single premium. Because of the large amount of money that is initially deposited, single premium life insurance policies usually start out with a substantial amount of cash value. Also, because the premium is all being paid into the policy up front, single premium life insurance policies are typically purchased at a large discount as compared to the total premium amount of a straight life policy over a number of years.
- Modified – Modified whole life insurance will require that the policy owner pay premiums throughout the life of the policy. However, there is an initial premium discount in the early years, and just one premium increase after several years. These policies are usually a good choice for those who want permanent life insurance coverage, but currently cannot afford the premiums.
- Graded Premium – A graded premium policy will also have discounted premiums in the early years. However, rather than just one premium increase, these policies will typically have several. Therefore, the premium will grade upward over time. In this case, the premiums will usually level out higher than with a straight life policy.
- Indexed Premium – With an indexed policy, the policy’s face amount will increase based on increases in an underlying index such as the Consumer Price Index (CPI), if the policy owner chooses to accept the increase. (The increase will also cause an increase in premium). If the policy holder chooses not to have the face amount increase, in some cases, they will not be offered another option to do so. In addition, insurers typically place a cap on the total increase that is permitted.
- Indeterminate Premium – Intermediate premium whole life insurance policies work on a “dual premium” concept, which includes a maximum premium along with a discount that could reduce the premium. These policies are considered non-participating contracts, and they were initially developed to compete with participating life insurance policies. The actual premium that is charged is never more than the maximum premium that is specified in the policy contract. However, these plans allow the policy holder to share in the insurer’s performance by applying discounts to the premium when the insurer is doing well financially. These types of policies will also endow when the insured turns age 100, should the policy still be in force.
- Current Assumption – Current assumption policies are a type of hybrid of traditional cash value life insurance and universal life insurance. These policies are non-participating and they have some after-the-fact adjustment mechanisms without actually creating an actual policy owner cash dividend. The adjustment mechanisms allow the insurer to constantly fine-tune its policy and keep it competitive in the market place, based on actual company experience. At the time of the policy’s issue, the premium and the death benefit levels are all fixed, but only for a certain period of time such as 5 years. The premium and death benefit amounts are based on anticipated interest, mortality, and expenses. At the end of each policy period, the premium – as well as the death benefit (sometimes) – are recalculated, taking into account the actual accumulation account value and new experience assumptions. Current assumption whole life insurance policies are sensitive not only to interest or investment performance on underlying assets, but also to the mortality and expense experience of the insurer. You can also get these with a variable life policy, which has an investment account instead of the savings account you get with other forms of permanent insurance.
How and Where to Obtain Whole Life Insurance Quotes
When seeking whole life insurance quotes, it is typically best to work with a company that has access to more than just one insurance company. That way, you will be able to directly compare different policies, benefits, and premium quotes.
If you are ready to begin the quote process, I found a great company to help. I have partnered with Root Financial who works with the top life insurers in the market place, and they can help you to obtain all of the information that you need. In order to get started, all you need to do is fill out and submit the form on this page.
Should you find that you have any additional questions regarding whole life insurance, how to obtain whole life insurance quotes, or even about life insurance in general, Root financial will be in touch with you after you submit your information. They will walk you through whatever questions you may have and make sure you understand the every detail of the life insurance you are getting. Since they are an independent agency they do not work for any one insurance company but will work to make sure that you get the absolute best rates on the coverage you need.
No matter what type of policy you choose, getting life insurance is vital to a good financial plan. So make sure you explore your options and get a policy that fits your family.