Whole Life Insurance

Whole life insurance refers to a life insurance policy that is valid for the insured’s entire life. In most cases, whole life insurance requires the payment of premium every year. In Commonwealth of Nations, whole life insurance is known as whole of life assurance.

History

Initially, all life insurances were temporary insurances. However, these term life insurances only paid claims on premature death within the stated term. This meant that policy holders paid premiums to insurance companies for 20-30 years and in most cases wound up with nothing to show for it.

Facing intense market pressure actuaries came up with an insurance policy that required level contributions that would last over a lifetime. These contracts offered a “cash value”, which acted as a cash reserve that would accumulate against the known claim-the death benefit. The contracts also offered guaranteed interest on the cash value account.

On maturity, which is generally at age 95 or 100, the cash value would be equal to the death benefit. As the death benefit was guaranteed, the policy holder would be assured that the coverage would be in force when he/she died. Once the policy holder died, the cash value would be surrendered to the insurer and the beneficiary would be entitled to the death benefit. In case, policy holder, wished to borrow the cash value and forfeit the death benefit, before his/her death, he/she would receive cash value with interest less any dividend payments.

Types

There are many different types of whole life insurance policies, including Non-Participating, Participating, Indeterminate Premium, Economic, Limited Pay, Single Premium and Interest Sensitive.

Non-Participating

In this type of policy, all values associated with the policy are established at the time of policy issuance. These values last for the entire term of the contract and generally cannot be amended after the policy has been issued.

Participating

In this type of policy, the insurer shares the excess profits with the holder of the policy. In most case, these refunds or dividends are not taxable.

Indeterminate Premium

This type of policy is similar to Non-Participating. The only difference is that the premium may vary from year-to-year. But, the premium will never be more than the maximum premium guaranteed in the policy.

Economic

This type of policy is a blend of participating and term life insurance.

Limited Pay

This is similar to participating policy. But the policy holder does not pay annual premiums for life. Instead, premiums are only due for some years.

Single Premium

In this policy, the policy holder makes a single large payment up front.

Interest Sensitive

A new type, this policy blends features of traditional whole life and universal life.

Requirements

In general, policy holders are required to pay premiums for the life of the policy.

Guarantees

The insurance company, in most cases, guarantees, the policy’s cash values will rise regardless of the performance of the company or its experience with death claims.

Liquidity

Cash values are seen as liquid enough to be used for investment capital, if  owner is financially sound enough to continue making premium payments.