Whole Life Insurance
Permanent insurance (such as universal life, variable universal life and whole life) provides long-term financial protection. These policies include both a death benefit and, in some cases, cash savings. Because of the savings element, premiums tend to be higher. This type of insurance is good for long-range financial goals.
Purchasing permanent insurance is like buying a home instead of renting. You are taking care of long-term housing needs with a long-term solution. Your monthly costs may be higher than if you rent, but your payments will build equity over time. If you purchase permanent insurance, your premiums will pay a death benefit and may also build cash value that can be accessed in the future.
Whole life insurance (often referred to as straight life or permanent life) is protection that can be kept in force for as long as you live. By choosing to pay a premium that does not increase as you grow older, you average out the costs of your policy over your lifetime on a yearly basis.
The "cash value" is an important feature of whole life insurance. This is a sum that increases over the years on a tax-deferred basis. If you cancel your policy, you can get the cash value in a lump sum. You pay taxes only if the cash value plus any policy dividends you may have received exceed the sum of the premiums you have paid. Most policies contain a table that enables you to tell how much cash value it has. You should consult your producer or company for further information.
Cash Value Insurance combines death benefits with an accumulation feature. The buyer of a cash value policy pays more in the early years than for term insurance, but the premium not needed to pay for the cost of the death benefit accumulates at interest. If the policy is surrendered before the insured person dies, there may be a cash value paid to the owner. Make sure the agent/broker provides you with the method by which the cash value is determined and that they obtain this information based on the policy’s guaranteed value. As a general rule, it is not a good idea to buy a cash value life insurance policy if you plan to surrender early. If all premiums are paid, cash value insurance usually lasts for the whole life of a person and pays death benefits to the beneficiaries named in the policy upon the death of the insured. The cash value can be used as loan collateral for borrowing funds at the interest rate specified in the policy. Any outstanding loans are deducted from policy proceeds at death or at policy surrender.
Whole Life Insurance (also known as straight life, ordinary life, and traditional permanent insurance) has guaranteed premiums and death benefits, and a minimum interest rate, which will be credited to the funds accumulated in the policy. On some whole life policies, higher interest rates may be credited to those funds depending on the future performance of the insurance company’s investments.
Whole Life Insurance may be called straight life, ordinary life, or permanent insurance. Whole Life Insurance covers you for as long as you live, as long as you pay the premiums. There is no need to renew Whole Life policies.
In order to buy Whole Life Insurance you will usually have to fill out a health questionnaire, and you may need to have a medical exam. Depending on the medical information you provide, your premiums may be higher than the standard rate, or the insurance company may decide not to offer you a life insurance policy.
It is important to be very honest about any medical conditions which could affect your life insurance. Your beneficiaries might receive no benefit at all if you die within two years of buying the policy and you have not told the truth about a situation or medical condition which would have caused the company to deny you insurance if they had known the truth.
With a Whole Life Insurance policy, you generally pay the same amount in premiums for as long as you live. This premium is based on your age and your health at the time of purchase. In some cases, the premium you pay may change over time, but you would be shown this when you first buy the policy. Be sure you understand what your premium payments will be and that you can afford them over time.
In the early years of the policy, premiums for Whole Life Insurance may be much higher than you would pay for the same amount of Term Life Insurance. But remember, the premiums in most term policies will rise each time you renew.
Many Whole Life Insurance policies also earn dividends, usually on an annual basis. If you do not take the dividends out when they are earned, but instead leave them on account with the insurance company, the dividends will also earn interest.
If a company pays dividends, it may pay more or less in dividends than it had been paying when you bought the policy. The dividends a company will pay depend on many factors, including the performance of their own investments and the efficiency of their operations. The company's earnings and expenses can fluctuate just like the stock market. When you are choosing an insurance company that pays dividends, ask for a company's history of projected dividends versus paid dividends. Remember that dividends are not guaranteed and may differ from those shown in sales illustrations.
Sometimes, dividends may be used to purchase Paid-Up Additions (PUA's) to your policy, an increase to the death benefit. Some companies will use the dividends on your policy to buy additional Term Life Insurance. But, you might have less insurance than you planned if the dividends go down and these additions did not supplement your benefits.
In recent years, many consumers were told that dividends their policies earned, and the interest on those dividends might, or would, become large enough to pay the premium payments. (This is sometimes called "abbreviated payment," or "vanishing premium.") But, often this didn't happen and those consumers were stuck paying for insurance they couldn't afford. Or, they lost their insurance plus all the money they had paid in.
If you decide to buy a policy which has an abbreviated payment or vanishing premium option, you should keep close track of your policy's earnings. Changes in interest rates, cost of insurance, policy expenses and loans can quickly eliminate your policy's ability to pay for itself. Even if you can stop paying premiums at some point, you might have to start paying again at some later point.
Unless the insurance company guarantees in writing that you will no longer have to pay premiums after a certain time, you should assume you will have to continue to pay.
Whole life insurance is lifetime coverage at a premium that does not increase with your age after you buy. In the early years of the policy, when you're a low risk, you'll pay more in premiums than it costs to insure you.
As you become a higher risk at an older age, the level premium eventually becomes less than the amount it takes to insure you. Level premium payments build a reserve in your policy that is used to insure you as you age. Insurance companies call this reserve the "cash value."
Whole life insurance: Whole, or "ordinary," life insurance is usually sold with a level premium. In the early years of the policy, the annual premium will be higher than comparable term insurance. (But because its premiums are level, whole life's annual premiums may eventually be less than term.) Whole life policies build up a cash value that consumers can withdraw or borrow against. There are many variations of whole life. Premiums may be payable for a specified number of years on a limited-payment basis. Consumers also may have the option of a single premium — paying all of the premiums at once with a single lump sum.