Explaination of Whole Life Insurance

2006-01-23

Whole Life Insurance policies remain in force for the duration of a policyholders lifetime as long as they pay scheduled premiums on time. The policy premiums do not vary and a guaranteed sum is paid on the death of the policyholder.

This differs from term life insurance policies where the insureds beneficiaries receive no benefits if the policyholder dies after the expiration of the policy's term. In addition, all whole life policies build up cash value and allow for possible dividends. Policyholders may choose to use these dividends in various ways. Most buy more insurance, receive the dividends as cash, or use the dividends to lower or eliminate premium payments.

The younger you are when you purchase a whole life policy, the less expensive the annual premiums will be.

Whole life insurance policies earn dividends that result when the actual life insurance costs of the insurer turn out to be less than assumed when the premiums were set (lower than expected mortality rates). When this happens, the insurer may return a portion of your premium to you as a dividend. Dividends are usually not guaranteed.

Unlike term life insurance, which accumulates no cash value, some of the money paid for whole life insurance accumulates as guaranteed cash value. If you choose to surrender the policy, this cash value will be available for your use. You may also choose to borrow against the cash value of the policy as a policy loan.

The amount of guaranteed cash value usually depends on the type of whole life policy you have, how large it is, and how long you have had it. Borrowing against a policy usually reduces the death benefit and cash surrender value.

Whole life insurance policies can be purchased with a variety of options:

Ordinary Whole Life Policies. These policies assume that policy premiums will be paid until the insured reaches the age of 100, at which time the death benefit equals the cash value of the policy. Since most people die before the age of 100, most policyholders cash out these policies long before they reach their maximum potential value.

Limited Pay Whole Life Policies. Policyholders who select this option pay significantly larger premiums over a shorter period of time in order to 'pay up' the maximum possible value of a policy. The premium payment time period is usually expressed in the number of years to be paid (Life-Paid-Up in 10, 15, 20, etc) or the age at which the policy premium payment ceases (Life-Paid-Up at 65, etc).

Interest Sensitive Whole Life Policies. Instead of paying dividends, these whole life policies pay interest on your accumulated cash value. Cash values are higher in these policies as money that normally would be paid out as dividends is instead reinvested in the cash value account.

Universal Whole Life Insurance. An adjustable premium whole life policy that is flexible in terms of an adjustable death benefit. In other words, you may choose that the death benefit remains level or increases over time. With universal life insurance, you also have the ability to stop and resume premium payments at any time if you have enough cash value in the policy to pay the other charges such as administrative fees.

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