Whole Life Insurance for Dummies

A whole life insurance policy is permanent insurance that is designed to provide coverage for the policyholder’s entire life. As long as he or she pays the premiums as scheduled, a whole life policy will remain in effect until maturity. Maturity is defined as the point at which the death benefit is paid to the beneficiary or beneficiaries. Like all permanent policies, whole life includes a cash-building investment component. Part of the premium, whether it is paid monthly, quarterly or annually, is applied to the cost of the insurance while the other part is credited to the cash account.

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The premiums paid for a whole life insurance policy are usually higher than those paid for term insurance, especially during the early years of the policy. A whole life policy, however, particularly one acquired at a young age, is usually quite more cost effective.

Unlike term life insurance policies, several whole life insurance polices provide for level premiums. Many people find it much easier to budget their insurance costs when their premiums remain level and fixed for the life of the policy. What does change over time is the amount of the premium that is applied to the insurance portion of the contract and the portion that is applied to the investment portion. As the insured ages, the portion that goes toward the insurance increases because the probability of paying the death benefit increases.

Selecting Among the Different Types of Whole Life Insurance Policies

Whole life policies vary among the many life insurance companies. However, there are six primary types of whole life policies:

Participating Policy

A participating whole life policy pays a dividend. The dividend reflects policy owner’s share of the profit of the insurance company. A participating whole life policy owner is in effect a shareholder of the insurance company in the same way he or she would be if shares of the company’s stock were owned. Depending on the distribution method chosen by the company, the policy owner can take the distribution in cash, use it to reduce the premium amount, purchase a higher level of coverage or set it aside be paid a set amount of interest. No company will guarantee profits, however, so distribution of the dividend is not guaranteed.


A non-participating whole life policy does not participate in the company’s earnings. Therefore, it does not pay a dividend. As one would expect, premiums for a non-participating policy are not as expensive as a participating policy.

Level Premium

A level premium whole life policy offers premiums that do not increase as long as the policy in force. Depending on the age of the insured at issue, the premium may be significantly higher than any other type of permanent insurance during the first several years of the policy. But it is usually much lower in later years than other types of insurance. Because the premium is level for life, it reflects the average cost of insuring the individual over time.

Limited Payment

A whole life policy with a limited payment option allows the policy owner to pay premiums for a set number of years rather than for life. Just like a policy with a level premium, the premium amounts are skewed in order that the total amount paid over time equals the amount that would be paid over a lifetime. This option is best for those individuals who need to have permanent coverage for life, but who don’t want to make payments for life.

Single Premium

This type of whole life policy is purchased with a single lump-sum premium payment. Unlike the other kinds of whole life policies, a single premium policy has immediate equity that can be borrowed or used as collateral for a mortgage or almost any other type of debt. Single premium whole life policies are more often used as investment vehicles for estate planning or additional retirement savings. They are also purchased instead of immediate annuities.

Intermediate Premium

Intermediate whole life policies offer flexible premiums. The premium adjustment each year is based on the insurance company’s cost to manage the policy. This management fee is called the “earning, mortality and expense” cost. The insurance company will estimate the management expense and will then include it in the premium charged to the policyholder. Due to the potentially volatile nature of these charges, most insurance companies will guarantee a maximum amount above which the premium will not rise.

Borrowing Against a Whole Life Insurance Policy

Provided a policy owner has enough cash in the account, he or she can borrow against the equity or use the policy as collateral. Policy owners are always advised, however, to read the contract carefully as each insurance company has different rules and regulations regarding loans, loan rates and the terms for paying back the loan. The availability of funds is often very useful in the event of the loss of a job, long-term illness or other financial situation in which the policy owner needs cash.

In the event it is necessary, a whole life policy can be surrendered for its cash value. The policyholder may not to receive the entire amount of cash in the account, but he or she can still surrender the policy in order to get cash.

Whole Life Insurance as a Retirement Savings Vehicle

Many people choose to purchase single premium whole life insurance policies as part of retirement savings plans. Not only do they purchase the benefit of insuring their families from financial hardship when they die, the cash amount of the policy acts as a safety net. And, the interest and earnings credited to any whole life policy grow tax deferred. This often results in an accumulation of savings faster than other types of accounts, as more money is available for compounding.

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