Whole Term Life Insurance

As the name implies, whole term life insurance is an insurance contract designed to remain in force for the whole life of the insured. It is the most basic form of permanent insurance. In addition to its guaranteed death benefit, whole life offers level lifetime premiums and a cash value that may be redeemed or used as loan collateral. The cash value gradually increases over time until the policyowner attains age 95 or 100, at which time the cash value equals the amount of the death benefit and the policy matures.

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Details of a Whole Term Life Insurance Policy

An applicant for whole life insurance must undergo a medical examination to verify his or her insurability – the existence of a hitherto-unknown preexisting condition may markedly affect the insurance company’s assessment of mortality risk. The death benefit, or face value, of the policy will be paid upon submission of a notarized death certificate to the company. The beneficiary or beneficiaries are guaranteed to receive the death benefit as long as premiums have been paid to keep the policy in force, but the cash value will revert to the company. This means that the insurance company’s net amount at risk – an important component in calculating premiums – is reduced by the cash value. In effect, the insured has been induced to (partially) self-insure the risk of mortality.

The Two Accounts of a Whole Life Insurance Policy

The whole life insurance policyowner’s premium is allocated between two accounts. The first account is the cost of insurance protection, actuarially computed by calculating the amount necessary to generate the money to pay the death benefit at the insured’s statistically-estimated death. The second account is the cash-value, or cash surrender, account, which is equivalent to a savings account. This account receives a guaranteed interest return, generated by the insurance company’s conservative investment in fixed-income securities.

The Importance of the Insurance Company’s Financial Strength

As with all insurance products, payouts are guaranteed by the financial strength of the insurance company. Four major ratings agencies, including A.M. Best and others, evaluate the financial strength of life insurance companies and publish their results. Would-be buyers of whole life should verify the financial soundness of the insurance company before transacting.

Types of Whole Life Insurance Policies

There are various types of whole life insurance policies. The major ones are described below.

  • Non-participating: The key parameters of the policy – the death benefit, cash value and premium rates – are fixed at issuance of the policy and cannot be altered. The effect of this is to place all risk of performance on the insurance company.
  • Participating: Here, the policyholder stands to gain if the insurance company earns higher-than-anticipated profits. In this event, a dividend is paid to the policyholder’s cash account. By definition, all policies issued by a mutual insurance company are participating.
  • Indeterminate Premium: Instead of a fixed, level premium, the policy will specify a guaranteed maximum premium. Below the maximum rate, premiums are free to fluctuate in accordance with the performance of the company.
  • Economic: This gives the option of purchasing additional term insurance to increase the death benefit. The additional insurance is purchased by debiting the cash account. A participating feature allows the cash value and death benefit to vary in accordance with insurance-company performance.
  • Limited Pay: This allows the policy to be paid up, after which the insurance continues but premium payments cease.
  • Single Premium: Premiums consist of one single lump-sum, upfront payment.
  • Interest Sensitive: The death benefit remains fixed but the interest accrued in the cash value account varies with market interest rates. Premiums may also vary but cannot exceed the contractually-stipulated maximum.

Premiums for Whole Life Insurance

Premium rates for whole life insurance are the highest of any basic type of insurance. For example, they may exceed term insurance premiums for a given death benefit by a factor of 10. This is owed to the fact that premium dollars not only pay for the cost of insurance but also to establish, manage and administrate a savings program for the policyholder.

Rates of return for whole life insurance are the highest for any category of permanent insurance. Within the category of whole life, the dividends generated by a participating policy tend to raise the rate of return above that of other policies.

Surrender or Leveraging of a Whole Life Insurance Policy

It takes a few years for cash value to build up on a whole life policy. Once generated, cash value can be accessed in several ways. The policyholder may surrender the policy for its cash value. The proceeds are tax-free up to the aggregate volume of premiums paid, which are considered return of principal. Further tax-free income may be created by taking out a loan with the cash value as collateral. The lapse of the policy, however, will cause taxes to be due on the loan. If not repaid before the death of the insured, the loan amount will be repaid out of the death benefit.

Suitable Candidates for Whole Life Insurance

In principle, anybody with a permanent insurance need is a candidate for whole life insurance. In practice, certain purposes particularly lend themselves to permanent insurance in general and whole life insurance in particular.

A policy designed to cover the insured’s final expense, especially burial expenses, must be permanent because the insured’s date of death cannot be predicted. To guarantee that the policy term will extend to the death date, permanent insurance is necessary. Companies offer policies specifically designed to meet this insurance need.

Many businesses are owned by sole proprietors and partners. Unlike corporations, which are designed to operate in perpetuity, sole proprietorships and partnerships are endangered by the death of one or more of the principals. To insure the continued functioning of the business after the death of the owner or a partner, business- succession insurance is indicated. This type of policy pays a death benefit sufficient to buy the insured’s interest in the firm. The beneficiary may be a designated successor or one or more partners. Again, the uncertain mortality date demands a permanent insurance policy.

Another type of business insurance is key-person insurance, which insures the life of an owner or highly productive employee whose contribution to the business warrants insuring their life. (This policy is normally an asset of the company, which is the policyowner.) Once again, permanent insurance may well be indicated, although some circumstances will point to term (temporary) insurance instead. For example, the key person may be slated to retire within 5, 10 or 15 years. This type of insurance is often demanded by lenders, creditors or venture-capital investors.

Whole-life insurance is employed for a variety of purposes in estate planning. For example, the fact that death benefits are income-tax-free makes life insurance attractive as a bequest. These purposes are so fundamental that they will often override the drawback that the death benefit may be reduced by estate taxation.


Whole life insurance is the basic building block of permanent insurance. It displays the benefits and suffers the costs of that approach. Nonetheless, its specialized uses alone make whole life an invaluable tool of risk-management and wealth creation.

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