General Life Insurance Topics
What is Whole Life Insurance
Titles for Whole Life
The inclusion of “whole” in the above subject line reveals what that form of life insurance is. It is any life insurance policy which lasts for the entirety of one’s life. Whether it be a policy which accumulates a cash reserve or just provides a death benefit upon the demise of the insured, it matters not. The only factor is that it be in force when death occurs.
However, to distinguish them from term policies which are limited in coverage time, and due to the need for marketing purposes, and as a way to describe benefits, available insurance policies have taken on the titles of whole life, universal life, adjustable life, 10, 20, 30 pay life, modified life, extraordinary life, permanent insurance, along with a myriad of company specific names.
Common among Different Types of Whole Life
Each of these features is to some degree included in the whole life contract:
- A premium which is predetermined for the life of the policy
- A cash reserve
- Participation in profits
- Income tax free accumulation
- Paid up provisions
- Some other nonforfeiture guarantees.
Premium Payment Options
Due to actuarial tables based on large numbers of participants and with the assistance of computer models, the insurance industry can fairly accurately determine life expectancy and can therefore project premiums required so they will remain constant over the time of the contract. They can calculate those premiums for various methods of payment, i.e. 10, 20, 30 pay life, age 65, age 100, or longer. Premiums thereby can be established so the insured does not appear to be paying them forever out of existing income but they are being paid from the reserves established by the company.
Since this method of payment of leveling the total premiums to be paid over the lifetime of the contract a cash reserve is developed and appears as a nonforfeiture guarantee within the policy contract itself. It becomes a contractual right, even though there is not an account specifically set up for each individual policyholder to draw from the general reserves of the insurance company.
In some instances policies issued by the life insurance companies also have a provision which allows individual policyholders the opportunity to participate in excess earnings or dividends generated by investments and savings incurred from established operation practices.
These benefits have very favorable tax benefits attached to them. The cash value reserve is looked upon as simply premiums being held for future use, while dividends or excess earnings which are left with insurance companies are looked upon as a return of premium.This is true up until the dividends paid out exceed premiums paid in. Once that occurs, dividends then become taxable.
Paid Up Additions
Another benefit of whole life insurance is the paid up addition provision, a one time premium payment which allows an insured to use dividends to pay for a death benefit. The paid up addition is just like a mini life insurance policy on its own in that it continues to have a death benefit and cash values above and beyond the base policy.
If an insured decides he or she doesn’t want to keep paying on a whole life policy, he/she can elect to have a reduced paid up policy. This policy uses the accumulated cash value to provide payment which will cover the reduced face amount cost for the rest of the policy period.
Extended Term Insurance
If this does not appeal to the insured who doesn’t want to continue paying the premium, the insured can elect to use another nonforfeiture value called extended term insurance. This allows for calculating how long the built up cash value would pay for the existing death benefit with the life insurance company notifying the insured as to how long the coverage would stay in force. This usually appears from some correspondence from the life insurance company to the insured showing that such a provision has been activated.
Argument for Whole Life Insurance
A favorable argument can be used for purchasing whole life insurance when one views the reasons for having insurance coverage. Here are a few of them:
- life insurance for burial expenses
- for wealth transfer
- for income replacement
- to supplement retirement income
- to pay off the mortgage.
Only two of these reasons could be considered a temporary problem. All the others have lifetime impact. One can see the temporary nature of term insurance just doesn’t meet the long term financial needs of most people.
According to www.term-life-online.com, less than 2% of term policies written actually pay a death benefit while remaining amounts must come from some other financial source.
In quick summary then, if financial situations are of a temporary basis consider term insurance as a solution, but if they are of a more permanent nature, whole life insurance may be your best solution. Just remember, the best form of life insurance is the one in force when it is required to perform. Hungry children don’t know if proceeds came from term or whole life–they just know you cared enough to provide a solution.