Whole Life Insurance
Whole life insurance policies are a sort of life insurance product that remains in effect for the insured individual’s entire life. Generally, these policies require annual premium payments into the policy.
Whole life insurance policies are were created as a response to criticisms about term life insurance policies (policies that only remain in effect for a given period of time – say, 20 or 30 years). Consumers were increasingly unsatisfied that they were asked to invest a significant amount of money into these policies – but often received no benefit, given that the insured did not die during the time frame allotted by the policy. As such, actuaries working at large insurance firms developed an insurance policy with level, annual contributions that will last for an entire lifetime.
Whole life insurance policies maintain what is known as a cash value – a reserve of funds that is built up against the death benefit claim. As an added bonus, the cash that is carried in the policy is entitled to a certain degree of interest payments. When the contract matures, the death benefit is paid to the beneficiaries, while the cash value is surrendered to the insurance company. However, before the death of the insured, the insured can borrow against the cash value of the policy in order to capitalize on the money invested in the policy.
A number of different sorts of whole life insurance policies exist. The simplest are non-participating policies, where the insured cannot change the terms of the contract after the policy has been issued. In these cases, if the premiums paid fall below or exceed the costs of the policy, the insurance company makes up or benefits from the difference. Participating policies, on the other hand, distribute tax-free dividends to policyholders in the event that it becomes evident that the policyholders are being overcharged.
Economic whole life policies integrate elements of the participating model and term life insurance. This results in a lower net cash value, but often a better death benefit, though the death benefit will fluctuate based on dividends.
Limited pay policies resemble the participating policy, but only require premiums to be paid for a certain period of time, or up to a certain age. However, the policy continues past the time that the last premium is paid. This option is quite a bit more expensive in terms of up-front cost, since the insurance company does not have as long to accumulate a cash balance. One variation of this sort of policy is the single pay policy, where a single large premium is paid.
The newest sort of whole life insurance policy is the interest sensitive policy – which combines whole life and universal live insurance coverage. The interest that is gained by the policy’s cash value is determined by market conditions rather than dividends. As with universal life insurance, the premium payment will differ, but never exceed the maximum premium stipulated by the policy. This is also similar to the indeterminate premium model that is employed by some insurance companies.