Whole Life Insurance – Not Quite 31 Flavors

Whole Life Insurance is the granddaddy of them all, in some ways the simplest to understand of all insurance policies. In its simplest form, you promise to send the carrier a fixed check each year for the rest of your life, and they promise to send your beneficiaries a fixed check when you die. Seems pretty straightforward. That’s why we had to introduce dozens of options on the simple chassis. Here are the basics:

  • Continuous Premium Life Insurance A standard form of Whole Life Insurance. Premiums are paid for the life of the insured or to age 100, at which time the policy endows and the death benefit is paid.
  • Limited Pay Whole Life The full premium of the policy is paid out in a fixed number of payments over a fixed period, such as ten or 20 years. At the end of the selected period, the policy is paid up and no further premiums are due.
  • Single Premium Life Insurance Single premium, as the name implies, is a life insurance policy in which a single premium payment at policy inception pays for the policy for the life of the insured. No further premiums are ever due, and the policy is guaranteed to last the lifetime of the insured.
  • Combination Policies or Blended Life These policies are a blend of term and permanent insurance coverage. These policies offer a lower premium than regular permanent life, but can last the entire lifetime of the insured.
  • Indeterminate Premium Life Insurance Normally sold by stock insurance companies. They have a lower premium guaranteed for the first three to five years, and then the premium is adjusted for the remainder of the policy’s life.
  • Adjustable Life Insurance Adjustable life combines term and whole life. The premium, death benefit, and length of term may all be adjusted by the policyowner.
  • Joint Life (First-to-Die) First to Die policies insure two people with one policy. The policy matures and benefits are paid when the first person dies. The premiums are lower than if two policies were bought.
  • Joint and Survivor (Second-to-Die) Second to Die policies insure two people with one policy and pays benefits when the second person dies. Less expensive than a single policy, especially when one of the insureds has health issues. Second to Die policies are very effective estate transfer funding tools.
  • Juvenile Policies These policies are issued in $1,000 increments.. Starting at age 21, the death benefit jumps five times. Although coverage goes up, premiums are not increased, and no proof of insurability is required. The juvenile becomes owner of the policy at age 21.
  • Family Protection Policies The family income policy, or rider, provides an income to be paid upon the death of the primary wage earner. The payout period, which is set when the policy is written, is set to match the years the wage earner was expected to support the family. Often used to guarantee an income until the youngest children are grown and out of the house.
  • Endowment Policies Endowment policies are often used when a certain sum of money is needed at a certain age. The policy is overfunded so that it has a cash value equal to the death benefit at a specified age (rather than at age 100). Benefits are paid at the endowment date, and the policy is cancelled.
  • Modified Endowment Contracts In 1988, the Technical and Miscellaneous Revenue Act (TAMRA), defined a new type of insurance contract the modified endowment contract (MEC). Because it looks more like an investment vehicle than a life insurance policy, withdrawals from this type of policy were singled out for special tax treatment. A standard permanent life insurance policy can be accidentally turned into a MEC if the owner over funds the policy early in its life. Talk to a qualified agent to make sure that your funding approach to your policy doesn’t eliminate its tax advantages. Policies that are funded more rapidly than the 7-pay life policy are those in which large premiums were paid in during the early years of the policy. Because a single premium policy is obviously funded more rapidly than a 7-pay life policy, it is considered a modified endowment contract (MEC) .Withdrawals from a MEC are taken first from interest (earnings) and are taxed as ordinary income. Only after all the earnings are taken out can the owner’s cost basis be recovered tax-free. Under a standard policy, distributions are taken first from premium overpayments and are non taxable.

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