As its name indicates whole life insurance is designed to provide insurance coverage for a life time. In other words its for a whole life or permanent. The insurer will assure a set payment to the policy holder’s beneficiaries if the policy holder passes on (regardless of age). This of course would only occur if the contract is kept up (premiums are paid).
With this type of life insurance policy a cash balance is accumulated over a life time until it equals the death benefit. This cash component is generally invested conservatively (often bonds but it can vary). As whole life coverage does have a cash component loans are frequently allowed. There are parameters set in a policy before a loan can be taken. Policy age and cash balance play a factor in borrowing off the insurance coverage. Usually a policy can be surrendered for its cash value minus loan(s) and premiums still owed.
A great benefit of whole life insurance is that it is permanent and won’t need to be renewed. This is great because future medical exams need not be done. So it can work for someone looking for long term life insurance, especially if its for more than 20 years.
Its important note that whole life can have high fees. So its vital to check with the insurance company and/or broker and have them disclose what they are. Whole life insurance premiums are often many multiples of term life insurance.
Below you’ll find a few whole life insurance policy types:
- Non-participating: All policy values are final at policy issuance. There are no surprises with this whole life insurance type as premiums, surrender values etc are all spelled out and not adjustable. The insurer takes on all the risk and no matter what they make on the policy nothing extra will pass to the policy holder.
- Participating: This whole life policy allows the insured to benefit from surplus profits the insurance company gets on the policy. These are often called dividends. A policy holder may be able to reinvest these dividends into the cash value.
- Single Premium: The entire whole life policy is payed up front in a lump sum. Its important to know what fees are involved in the beginning years of the policy.
- Interest Sensitive: Dependent on market conditions the interest accrued on your cash value will variate. Also your premiums can variate but there is a ceiling on them. The death benefit never changes and as is good for life.
- Limited Pay: This whole life policy allows the the policy to be payed off early at a certain age instead of paying the premiums for life.