Whole life insurance

Whole life insurance, also known as Permanent life insurance provides life insurance for the entire lifetime of the policy holder. The premiums in this policy are paid yearly leveled for life; however in the early years of the policy, premiums will exceed the insurance costs of the company. In short, you would be overpaying the true annual insurance cost in the early years of the policy but later when the cost exceeds what you are to pay as premiums, the overpaid amount would make up the cost difference. Hence, one pays more initially to pay less in the future!

Premium amounts can be paid up for over 20 years (age 65-100 years). One can also cancel the policy after a period of time known as a cash surrender option and receive a lump-sum tax-free payment. Most of the refund amount known as the cash value would be the overpayment in premium and not some sort of investment.

Whole life insurance can act as either participating or non-participating (par or non-par, respectively) policies. Most policies are par policies where the insurance companies charge higher than necessary premiums with the intent of returning the excess in the form of reduced premium amounts in the later years. The excess amount from the policy holder helps the insurance company to protect itself from non-diversifiable risk. Hence, the insurance company holds less insolvency risk which in turn is a relief for the policy holder. Whereas, in non-par policies insurance companies charge premiums that are estimated to meet expenses only and the premiums are lower than par policies. All the values associated with the policy are determined before the policy is issued for the life of the contract and cannot be altered later and the insurance company bears all the risks of future performance. However, par policies shall end up costing less than non-par policies if maintained long-term. Essentially, with participating whole life policies a risk does exist, but this risk is relatively insignificant.

When an insurance company determines a dividend for a year and the policy holder earns dividends each year as per the changing dividend then it is called as a Whole Life Permanent Insurance. This dividend when payable, can be used to pay for successive premiums or buy other insurance products. On death of the policy holder, the beneficiary is paid the coverage amount plus the dividend accumulated in the policy. You can also look for Whole Life policies with a premium for a fixed period of time; these are known as Limited Pay Permanent Life Insurance. There are no additional premiums involved to sustain the policy. In some cases you might also be offered a cash value after a certain period of time.

Advantages:

  • The main advantage of Whole life insurance is that it provides you with insurance coverage for as long as you live at the same rates that were guaranteed
  • Beneficiaries maintain their quality of life in the event of your death
  • Heirs can also use the benefits payable to them to help cover the capital gains tax on any assets