Whole life insurance is a type of life insurance meant to last for the entire life of the insured person of the policy.  It does not expire as term life insurance does.  If the whole life policy is purchased from a mutual company, it is also an ownership stake in the company itself.  In return for the ownership stake, whole life insurance pays dividends payments.  Whole life insurance is the original form of life insurance, dating to the year 1706.

An important feature of whole life and a way that it also differs from term life insurance is that it has a cash value.  In other words, the policy can actually be surrendered for the cash value of the policy, or a loan can be taken from it.  If you apply for a loan or need to produce a personal balance sheet for any reason, a whole life policy is listed as an asset.  The value of the policy grows over time as the cash-value account grows with age.  When the policy is mature (usually at age 105 or 115), the cash value will equal the death benefit and the policy pays out the full benefit.

Features of Whole Life Insurance

Whole life insurance has some very specific features and nuances that are very different than a term life insurance policy, or other forms of permanent life insurance.  In other ways, whole life insurance is exactly the same as other forms of life insurance.  We can help you buy a whole life policy.  Here is a look at whole life insurance.

Permanent

As the name implies, whole life insurance is meant to last for the entire life of the insured person, no matter how long that person may live.  As long as the owner is making the premium payments required by the contract, the company is warrantying that they will pay out the death claim upon death or policy maturity, whichever comes first.  Since whole life insurance is guaranteed to cover the life of the insured for their entire life, whole life insurance is often used to pass money on to the next generation with tax advantages or to fund trusts, or to help keep an estate liquid.

Because the cash value is meant to equal the face amount upon maturity, the earlier a whole life insurance policy is purchased the lower the premium payments will be.  People are also generally healthier when they are younger, so the cost of insurance is also lower.

Level Premium Payments For Whole LifeWhole Life Insurance

Premium payments to a whole life insurance policy are level (will never rise during the life of a policy), but an owner may have the option of paying an additional premium into the policy in order to build cash value faster.  Contractually, the owner only needs to make the minimum premium payments in order to keep the coverage.

Making additional payments may even enable the owner to stop making premium payments into the policy altogether at some point, and the policy will continue to remain in-force.  Some policies can even be designed to be “paid up” after a set period of years, ie 5, 10, or 20 years.   This will ensure an owner can stop making payments after the paid-up period ends, and the policy will remain in force, and continue to accumulate additional cash value, until the insured dies.

Because premium payments are always level, it means that premium payments can be relatively inexpensive late in an insured’s life.  This makes whole life insurance attractive for people who want to provide life insurance benefits to their beneficiaries no matter what age they may pass away.  While term life insurance will not pay a benefit if the insured outlives the guaranteed period, with a whole life insurance policy an insured can not outlive the policy.

Premiums Can Even Decline

We discuss dividends further below, but one important feature of whole life insurance is that it pays dividends.  These cash payments can be applied against premium, and with most policies, the dividend will eventually become larger than the premium due.  In almost every case the dividend will grow slowly over time.  While in the first few years the dividend may do very little to offset the premium, as the years go by the dividends will become a significant portion of the premium.  If this is how the owner of the policy chooses to use dividends, they can count on the policy becoming less and less expensive.

Whole Life Builds Cash Value

Whole life insurance policies also have a cash surrender value, meaning the policy itself builds value over time.  If the policy is surrendered during the life of the contract the owner will receive the sum of the cash surrender value, even though the insured is not deceased.

Loans can also be taken by the owner for any reason from the cash surrender value tax-free, and the value can be used to pay premiums if an owner misses payments.  This feature can make whole life insurance an attractive savings and investment tool for many people.  People can take loans to pay for a car, a home, an education, or even a vacation.  The cash value of a whole life insurance policy will eventually rise to a point where it outpaces the amount of money paid into the policy.  Because whole life insurance actually has a positive expected return as an investment, it is actually considered an investment-grade product.  It can take many years for the cash value to exceed the amount of money paid into the policy, but in almost every case it will happen.  This can make it a very conservative and secure way to invest money over a long period of time.

Whole Life Insurance Dividends

Whole life insurance policies are also eligible to receive dividend payments from the company.  The size of these payments is determined based on the age of the contract, the size of the death benefit, and cash surrender value of the policy.  They are also determined by the insurance companies’ profits and experience with rates of death of policyholders, and prevailing interest rates in the market at the time.  Because the calculation of what a dividend will be can be quite complex, if you need to forecast the expected dividends into the future you should ask your life insurance company for an illustration.  All else being equal, the more cash value a whole life insurance contract contains, the higher the dividend payment received by the owner in the future.

A whole life insurance policy will guarantee a minimum cash value each policy year if all premium payments are made.  Dividends are not always guaranteed (since they depend in part on company performance) but many major insurance providers have paid dividend payments consecutively for over 100 years, even though the financial crisis of 2008 and the great depression.

There are different options for how policy owners can use their dividends.  Dividends can either be used to buy additional paid-up insurance, so the death benefit rises over the lifetime of the contract, be used to build cash value faster in the policy, or can be taken as a cash payment by the owner.  If dividends are taken as a cash payment, they are a tax-free payment until the total of dividends paid out is greater than the total of the premiums paid into the policy.  In other words, the gain is taxed last.  This tax-preferred dividend treatment helps increase the value of a whole life insurance policy as an investment over a taxable bond.  Dividends can also be used to pay back an outstanding loan if there is one.

It is important to remember that with dividend payments, whole life insurance will provide a positive internal rate of return for contract owners over time.  While whole life insurance is not for everyone, financial planners do recommend it to high net worth clients.  Even without the payout upon death, it can be a valuable financial investment while the insured person is living.

If dividends are going to buy paid-up life insurance, the death benefit increases over time.  It also increases the future premiums that are paid.  It can be a bit of a projection to decide when to take dividends as cash and when to compound future payments by purchasing more life insurance with them.  This is why it is so important to have an experienced advisor who can compare different options by illustrating different outcomes.

Tax-Free Death Benefit

As with all forms of life insurance, the death benefit of a whole life insurance policy can be received tax-free by the beneficiaries. For this reason, combined with it’s safe and permanent nature, whole life insurance is often used for estate planning purposes.  It is also used to guarantee income for beneficiaries after the insured passes away, so the policy can not be outlived.  Keep in mind that life insurance can be subject to taxation under certain circumstances so it is always prudent to look for advice from a CPA or financial planner.

Buy Whole Life For Long-Term Security

Whole life insurance will always be there for your family, no matter how old you may become.  You know exactly what your premium payments will be, and exactly what your family will receive if you pass away.  You will be able to take loans from the policy value, and will usually receive increasing dividend payments over time for owning the policy.  For these reasons, whole life insurance provides maximum security for you and your family.

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