What is Whole Life Insurance?

Whole life insurance is a type of life insurance guaranteeing the premium payments and the death benefit. A whole life insurance policy has 3 components (1) premium, (2) cash value, and (3) death benefit. The cash value of the policy is typically determined by a dividend rate determined by the life insurance carrier. There are several types of whole life insurance policies available.

Non-participating Whole Life Insurance

The premium remains the same over the lifetime of the policy and the face amount is paid to the beneficiaries at the death of the insured. As long as the policy owner continues to make timely premium payments to the policy it will perform as originally illustrated. Premium payments should adhere to the payment schedule outlined in the policy contract. The cash values and death benefits of the policy are fully guaranteed, and will never change.

This is one of the most basic, easiest to understand forms of life insurance. Essentially, the insured is buying a term insurance policy that is guaranteed to last their lifetime.

Participating Whole Life Insurance

Participating whole life insurance policies have the same premium, cash value, and death benefit guarantees as a non-participating whole life insurance policy. The difference is participating whole life insurance policies earn a dividend based on the profitability of the issuing life insurance carrier. You are effectively “participating” in the profitability of the company’s earnings.

The dividend is determined once the life insurance carrier has collected all premiums, paid out claims, and other miscellaneous costs associated with a policy. Dividends are typically paid annually. Premiums for a participating whole life insurance policy are typically higher than a non-participating whole life insurance policy.

Whole life insurance policy holders have a few options when it comes to utilizing the dividend. We suggest reading, Dividend Options for Whole Life Insurance Policyholders.

Level Premium Whole Life Insurance

Level premium whole life insurance is a type of policy that requires a premium payment every year for the lifetime of the policy. Premium payments can be made on a monthly, quarterly, semi-annual, or annual basis. Initially, premium payments far exceed the cost of insurance (like most life insurance policies). The excess is used to create a reserve in the cash value to offset the cost of insurance in later years when the premium is less than the actual cost of insurance.

Life Insurance Mortality Curve – For Illustrative Purposes Only

Limited Payment Whole Life Insurance

Limited payment whole life insurance allows the policyholder to pay premiums over a predetermined period of time. Instead of paying premiums over the lifetime of the insured, the policyholder can, for instance, elect to make ten annual premium payments.

The number of premium payments is determined at inception of the policy. Most limited payment whole life insurance policies offer the option of paying over a number of year (e.g. 10-pay or 20-pay) or to a specific age (e.g. to age 65 or to age 85). Since premiums are paid over a shorter period of time, the premium amount will be great then a lifetime premium payment, but based on how long the insured lives a limited pay scenario could be less costly over the long run.

Single Premium Whole Life Insurance

Single premium whole life insurance is similar to a limited pay whole life insurance policy with one exception. The policyholder makes a one-time premium payment to secure the entire whole life insurance coverage for the lifetime of the insured. Once the premium payment has been made the policy becomes fully paid up and does not require any additional premium payments. Due to the single premium payment the policy will immediately have cash value.

Buying life insurance is important for those individuals who financially support dependents or other family members. It is also a critical asset to provide necessary liquidity for estate planning purposes. It is important to determine what your life insurance needs are, choose what type of policy will fulfill that need, and determine which life insurance carrier suits your unique situation. Click here to see how HNWLifeInsurance.com can assist you in this process.

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