Whole Life Insurance

Whole life insurance is a plan that has level premiums and offers cash value buildup. It never has to be renewed or converted. It is a plan of “guarantees”. It is life insurance for life as these policies are usually in force to age 100.


The Insurance company generally will guarantee that the policy's cash values will increase regardless of the performance of the company or its experience with death claims in a given year. There is also a guarantee with regards to a level premium, as long as you repay any policy loans.


Whole Life Insurance has a “savings account” (cash value) which grows tax-deferred. This money is considered liquid enough to withdrawl, but only if the owner able to continue making premium payments. Cash value access is tax free up to the point of total premiums paid, and the rest may be accessed tax free in the form of policy loans. If the policy lapses, taxes would be due on outstanding loans. If the insured dies, death benefit is reduced by the amount of any outstanding loan balance. The down-side is that you are not allowed to choose separate investment accounts for your cash value, i.e., money market, stock or bond funds. The Insurance Company controls how this money is invested and grows.


There are several types of whole life policies. Though there are many variations, for the sake of this explanation, we will define the six traditional forms: non-participating, participating, indeterminate premium, economic, limited pay and single premium.

1. Non-Participating

All values related to the policy (death benefits, cash surrender values, premiums) are usually determined at policy issue, are for the life of the contract, and usually cannot be altered after the policy is issued.

This means that the insurance company assumes all risk of future performance. If future claims are underestimated, the insurance company makes up the difference. On the other hand, if estimates on future death claims are high, the insurance company will retain the difference.

2. Participating

With this type of life insurance policy, the insurance company shares the excess profits (most commonly referred to as “dividends”) with the policyholder. The greater the success of the company's performance; the greater the dividend.

3. Indeterminate Premium

Similar to non-participating except that the premium may vary year to year. However, the premium will never exceed the maximum premium guaranteed in the policy.

4. Economic

A combination of participating insurance and term life insurance, where a portion of the dividends is used to purchase additional term insurance. This can generally yield a higher death benefit, though in some policy years the dividends may be below projections, causing the death benefit in those years to decrease.

5. Limited Pay

Similar to a participating insurance policy, but instead of paying annual premiums for life, they are only due for a certain number of years, such as 15, 20 or 30. This allows the policy to be paid up by a certain age. (many people choose 65) The policy itself continues for the life of the insured. These policies typically cost more up front, since the insurance company needs to build up sufficient cash value within the policy during the payment years to fund the policy for the remainder of the insured's life.

6. Single Premium

A form of limited pay where the pay period is a single large upfront payment. There are fees, usually, in the early years of these policies should the policyholder cash it in.

(*This article is intended for informational purposes only, and should not replace discussing your individual needs with your local Insurance Agent or Financial Representative.)


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