Whole life is the most standard type of permanent insurance. As it is rightly called, "whole life" provides permanent protection for your entire life; from the date you purchase it until you die. The premium payments in whole life are fixed, meaning they will not change over the life of the policy. It has a guaranteed cash value and death benefit, and includes a minimum guaranteed interest rate to hold the entire product together.
Generally speaking, whole life is the most expensive form of life insurance because you have to pay for the right to have guaranteed premiums and death benefit for life.
To give you an example, let's compare the different types of policies. Take Bob Smith:
|.||45 year old male|
|.||$500,000 insurance benefit|
|Type of Insurance||Annual Premium|
|Whole Life ( participating )||$65000|
|Variable Life( 6.65% )||$3300|
|Universal Life( 6.65% )||$1350|
|Term Life( 20 year )||$670|
|.||Permanent policies to endow at age 100|
|.||Permanent policies premiums paid continuously for the remainder of life|
|.||All comparison were calculated using the same carrier|
As you can see from the example, whole life is nearly double the amount of the other types of policies. The price discrepancy decreases amongst the different policies the older you get. This is because there is less time for the money to accumulate in the policy at the policy's interest rate.
Out Of Vogue
Because of higher cost for whole life, less flexibility, and low interest rates on the cash accumulation, whole life policies have fallen out of vogue since the 1980's. In fact, they've become so unpopular that many agents and insurance brokerage firms no longer carry whole life in their boutique of products. If you currently have a whole life insurance policy, you might want to consider converting it to other more cost effective plans.
Who Should Buy Whole Life?
You should buy whole life insurance if you want lifetime insurance with guaranteed premiums and death benefit and do not want to worry about interest rate or market fluctuations.
Non-Par vs Par Whole Life
Companies known as mutual companies have no owners other than the policy owners. Mutual companies pay dividends to their policy owners. A policy that receives dividends is said to be "participating". These dividends are considered the return of excess premium. Most policy reserves are based on conservative interest rate, usually 3.5% per year. Since the companies can generally earn more, they return a portion of the excess in the form of dividends. The cumulative dividends are treated as an income tax-free return until they exceed the cumulative premiums paid.
Non-Participating Whole life is slightly different than participating whole life because they do not pay dividends on the excess cash. Instead, they are usually "interest sensitive" and the excess goes into the cash accumulation. You can expect the price for non-participating whole life to range midway between universal life and participating whole life.
How They Calculate The Premium
Actuaries determine that the premium and reserve requirements are based on an assumed life expectancy of age 100. Since it is presumed that people die at age 100, the actuaries calculate the premiums, taking into consideration the guaranteed minimum interest rate in order to make the reserves equal the death benefit at age 100. Those reaching age 100 are paid the face amount of the policy because they survived the maximum period set by the actuaries. For this reason a whole life policy may be viewed as an endowment maturing at age 100.
A creation under the umbrella of permanent insurance universal life, is a product that actually separates the cost of insurance from the investment portion of the premium. The first generation had heavy front-end loads and used 1948 mortality table assumptions, but the product continued to improve and, within two years of its creation, companies began to introduce the "second generation." Universal life, a product created by consumer demand, has become a mainstay in the industry.
What is Universal Life?
Universal life (UL), often referred to on the policy as "flexible premium adjustable life," is composed of the same elements as any permanent product. The difference is that with universal life, the elements have been "unbundled," and therefore charges, and expenses are disclosed. In other insurance products such as whole life, these elements are visible only to the actuary who designed the product. The actuary takes them all into account but determines one composite premium rate for the product. This can make it impossible to determine where the money is going and does not allow for much flexibility.
Advantages of Universal Life
One of the main attractions of universal life is its flexibility. With universal life, you truly are in the driver's seat. You can tailor design the plan to suit your needs and budget. Each company has a minimum annual insurance premium that has to be paid each year to cover the mortality costs for the amount of coverage you selected. But other than that, like Burger King, you can "have it your way."
You can decide:
While universal life is not guaranteed quite to the extent of whole life, it still offers a guaranteed interest rate and has a maximum amount of charges. Most policies offer a guaranteed minimum interest credited to the cash value between 3.5% to 5%.
Death benefit options
You can choose the traditional, level death benefit, which is constant; or the second option, which provides a death benefit equal to the face amount plus the cash value. Many policies also offer an accelerated death benefit, which allows you to withdraw a percentage of your death benefit to help pay for a terminal illness or nursing care.
In effect, the level term costs are deducted each month to pay for the insurance in force. The balance of the premium is invested into your side fund.
Access to cash accumulation
You can either borrow your money tax-free or make partial withdrawals. Withdrawals are taxed on a "first in, first out" basis. If the money is borrowed, the insured usually pays the company 8 percent, but the borrowed funds continue to accumulate interest at 4-6 percent, for an extremely low, net cost of borrowing tax free funds. In fact some carriers offer a zero net cost of borrow.
You receive an annual report of all transactions, with summaries of current cash values, death benefits and all expenses charged, as well as of loans and withdrawals.
You can add money at any time, provided it doesn't conflict with the 1984 DEFRA guidelines that spelled out specific ratios between cash value and death benefits. Some companies offer a guaranteed future insurance purchase rider. If you believe your need for coverage will increase, this rider is affordable and very valuable. It isn't, however, available with every carrier.
Your face amount can be increased without buying another policy after providing evidence of insurability when required.
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