- Life Insurance

Whole Life Insurance

Whole life insurance is a type of permanent life insurance which combines a term life insurance policy with an investment component. While a term life policy is temporary life insurance and will only pay a death benefit to your beneficiaries if you die during the term covered, a whole life policy is guaranteed to pay out when you die as long as you continue to pay the premiums. A whole life policy can also be used for estate planning and as a tax shelter for the wealthy as the death benefit is tax-free to beneficiaries and the cash value is tax-deferred.

A whole life insurance policy is more expensive that a term life policy for the same amount of death benefit, with higher premiums usually payable for life. The savings component of the whole life policy is subject to fees and commissions which reduce the cash value. If you have the financial discipline to invest the money you save by buying a term policy you may earn more on your investments in the long term, but for many people the enforced savings component of a whole life policy is helpful for their long-term financial planning.

There are several different variations of whole life policy which vary in terms of premiums, dividends and guaranteed cash values. The major types are: non-participating ("non par"), participating, indeterminate premium, economic, limited pay, single premium and interest sensitive. For most whole life policies you can lock in level monthly payments for the duration of the policy, with the premiums averaged over the expected life of the policy. With a “limited pay’ policy you pay higher premiums for a shorter period of time such as 15 or 20 years and the policy is designed to be fully paid up by a certain age. With a “single premium” policy you pay the premiums in a lump sum. “Participating” policies can earn dividends if the insurer’s payout costs are lower than they anticipated when setting the premiums. Dividends are a return of part of your premiums and are not guaranteed. In “interest sensitive” policies the dividends are used to increase the policy’s cash value. “Economic” policies direct part of the dividend to increasing the term life component. “Non-participating” policies do not pay dividends. A portion of the money you pay for your whole life policy is for the investment component which accumulates as a guaranteed cash value, which is tax-deferred until the time it is withdrawn or paid out. If you need funds for an emergency or other expenses, you can borrow against this cash value, paying the current policy loan interest rate. The money that you borrow from the cash value of your policy reduces the policy’s death benefit and cash surrender value.

If you decide to stop paying your premiums and surrender your whole life policy you can withdraw the cash value, minus surrender fees. Generally the longer you have been paying into a whole life policy the lower the surrender fees and the larger the cash surrender value.

Whole life insurance can be a good choice if you have the ability to pay the higher premiums and value the enforced savings and the tax-deferred estate planning component.