Whole life insurance, also known as "whole of life" insurance, a life policy that is guaranteed to stay in force throughout the life of the insured, even if required minimum premiums are not paid, to the end of the insured's life. It does not expire while the policy is in force, and the beneficiary will not be able to sell it before its maturity date, if that is agreed upon in advance. The policy is also usually much less expensive than other forms of insurance. There is no expiration date on death benefits, so the benefit stays with the family longer after the insured has died.
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Whole life insurance policies to pay death benefits in two different ways. The most basic kind, and the one most people are familiar with, pay out cash values, which are exactly the same as conventional whole-life insurance premiums, in fixed percentages. The premiums may vary, though, depending on the insurance company and the policyholder's age and health at the time of death. For example, in some policies, a higher premium might be required if the insured were expected to live for a certain amount of time.
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Another type of coverage pays out to a beneficiary, generally someone other than the insured, once the policyholder dies. This is called a terminal or residual life policy. A third type of policy pays an additional dividend to beneficiaries who become owners of the policy after the insured dies. These types of policies are not as common, but there are some who do offer them.
What is Whole Life Insurance?
Whole life policies offer many advantages over other types of insurance. They provide permanent coverage and flexibility, with an investment option that grows with the investment portfolio, making this type of insurance a good choice for many different financial situations. Unlike some other types, however, the dividends received from these investments do not need to be paid out all at once. Instead, the money is invested in order to earn a regular rate, which allows the account holder to make the most of his or her money. And unlike permanent coverage plans, these investments do not need to be liquidated to access the funds, so the owner of the policy does not need to liquidate the policy at any point in time.
Whole life policies also offer an opportunity to borrow against the policy. Because these policies are more expensive than term insurance policies, they are often used to finance college education costs, as well as home and auto expenses, and the like. However, a term insurance policy allows the borrower to borrow only a specified amount and then must repay it within a defined period of time, determined by the lender. Whole life policies, by contrast, allow the borrower to borrow an unlimited amount and pay it back over the policy's lifetime.
The biggest advantage of whole life insurance is the fact that it provides a cash value which can be used for tax purposes. Because the policyholder is not required to pay premiums until he or she begins to collect on the policy, the death benefit grows with interest, just as a savings account does. Therefore, the death benefit does not have to be paid out right away, but if a person has adequate resources - perhaps through investments and a substantial amount of savings - then it may be possible to pay a death benefit down the road without negatively impacting other aspects of the policyholder's life.
Because of its increased flexibility, whole life insurance is usually less expensive than term life insurance premiums. Although the premiums may be higher initially, since they are only applied to the death benefit, the end result is a lower overall premium cost. This lower overall premium cost is, in turn, offset by the potential for a higher death benefit - if the policyholder were to continue to pay premiums until they reached a certain level, then the cash value of the policy would increase. Also, term life insurance premiums do not have the potential to grow indefinitely, whereas whole policies do.
Many insurance companies offer riders to their whole life policies to provide additional coverage. A rider is basically additional coverage that is paid once the initial premium has been paid on the policy. Many times, riders are needed to protect the policyholder from loss of benefit in the event of the policyholder's disability. However, riders are generally considered to be extra coverage and may decrease the value of the policy. Therefore, riders are often looked at more closely when purchasing insurance than are premiums.
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