Whole Life Insurance Questions

Life insurance is complicated for many people. What’s worse, a seasoned insurance salesman or persuasive website can make the benefits of a Whole Life policy shine like a diamond, but leave the uncertainties (usually, the fine print) in the dark. For this reason, this FAQ exists to educate consumers like you about Whole Life insurance. Term Life and Whole Life: What’s the difference? Term Life Insurance is for set terms—usually in terms of 10, 15, 20, or 30 years. Once the term expires and the insured is still alive, a request for additional terms must be submitted. Whole Life, on the other hand, lasts for the entire life of the insured—given that cash hasn’t been surrendered and premiums are paid-up. Are there any sub-types or variations of Whole Life? Yes and yes. Participating Whole Life is the kind where dividends are paid, but only when the insurance company experiences very good investment returns, in times where the mortality rate is low, and when they (the insurer) experience good times (financially speaking). Non-Participating Whole Life does not offer dividends, but does offer set insurance costs and lower premiums in general. Furthermore, there exist even sub-types of the former sub-types. Level Premium Whole Life has a set (level) premium over the life of the policy and living benefits (if applicable) cannot be denied. The premiums with this type of Whole Life policy will be somewhat higher, but will come in handy down the road when the cost of insurance goes up. Limited Payment Whole Life is for those who have more money to pay-up the entire policy in a limited number of years and payments. With this type of life insurance, premiums will increase significantly—but the length of time that they are paid is lessened dramatically. Singe Premium Whole Life is a policy that is set for the remainder of the insured’s life, and is paid in one large lump sum. Many times, it is used as an investment strategy—especially when extra money is added to that lump sum towards the cash value aspect of Whole Life. Indeterminate Premium Whole Life is like the traditional Whole Life policy, except premiums may be adjusted. The premiums can go up and down—depending on factors like returns, insurance costs, and mortality rates—but will not go higher than the agreed-on maximum premium cap. What is the difference between the death benefit and the cash value? The death benefit (aka “face value” or “face amount”) is the dollar amount that will be paid out to beneficiaries upon the death of the insured. Cash value is basically the savings component of the Whole Life policy. Insurers usually attach these accounts to an interest-bearing stock market index or bond, and will yield a interest return of about 4%. The cash value, once great enough, can be used for many things: as a fallback in case the insured is unable to make premium payments or miscellaneous costs associated with insurance, as a loan (where you surrender the cash value and leave only the guaranteed death benefit to survivors), as a savings/investment vehicle and so forth. Who should buy a Whole Life insurance policy and when? Whole Life is for individuals who need a significant amount of coverage and for the remainder of their lives. In addition to the cash value component, a Whole Life policy can serve as a component in planning your financial estate. In the short-term (e.g. 10-20 years), Term Life is much more preferable to people who do not want an investment tool with their insurance and want the lowest premium and the most flexibility. Over the long-haul, Whole Life becomes preferable because it guarantees coverage until death, with no renewals required, and has a savings component built-in.