Whole Life Insurance Policies

Whole life insurance is a traditional form of permanent life insurance. Whole life insurance plans are designed to provide insurance coverage for the whole life of the insured, whether he lives to age 50 or age 100. It provides lifelong coverage by having the insured overpay for the policy over many years. The excess funds earn a stable rate of return, and build significant cash value in the the insured’s account. In the later years of the policy, the carrier pays a rising portion of the underlying cost of the insurance from this excess cash value. Traditionally whole life policies have a premium that remains steady for the life of the policy. The amount of the over funding is targeted so that the policy’s cash value grows to match the death benefit at age 100 when the policy is said to endow. If the insured should die before age 100 the policy’s death benefit is paid to the beneficiaries. If the insured lives to age 100, the carrier will pay the accumulated cash value in a lump sum to the insured. Traditional fixed premium whole life is generally less flexible in its structure than other policy types. The primary alternative form of permanent life – flexible premium whole life- is generally called Universal Life, and is discussed in another article here. Traditional whole life insurance provides a fixed death benefit which remains available for the insured’s entire life. Premiums are structured to be paid until the insured’s death. A whole life insurance policy remains in effect as long as the policy owner pays the premium. However, if the premium is not paid, the insurance may lapse. During the time that the insured is alive, and the policy’s cash value is growing, that growth is tax-deferred. The policy’s cash value can be borrowed by the policy’s owner, and can even be used to pay the premiums if necessary. The policy can also be surrendered, and any remaining cash value in the policy will be paid to the owner. In the early years of the policy, it will have a surrender charge which is often greater than the cash value accumulated to that point. Mutual Companies (insurers owned by their policyholders rather than by stockholders) often issue “Participating policies”. When mutual companies are profitable, they often distribute those profits to their participating policyholders in the form of dividend payments. Because dividends are considered to be a return of unearned premium, they also receive favorable tax treatment. Until 30 years ago when universal life insurance was introduced whole life insurance was the primary product of most life insurance companies, and is still the most common form of life insurance sold today.

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