According to the 2011 Person-Level Trends in U.S. Life Insurance Ownership by LIMRA (Life Insurance and Market Research Association), ‘almost 2 in 3 insured adults have some permanent insurance as part of their individual life portfolios, and almost half carry some term insurance.’ The study showed a ‘shift to permanent insurance.’ Whole life insurance is the oldest form of permanent insurance. It has been called ‘ordinary life’ or ‘cash value’ life insurance and in the past often did not ‘participate’ or pay ‘dividends’ into the policy beyond its low guaranteed interest rate. However, today, all reputable insurers ‘participate’ or pay ‘dividends’ into their whole life plans. Also, the interest rate on the guaranteed cash value accumulation account of these policies average from about 3% to 5 % before any dividends are paid.
- GUARANTEED LEVEL PREMIUMS FOR LIFE:
There are various custom whole life plans available; however, in general the premiums for whole life policies remain the same throughout the life of the insured. During the early years of the policy, the premiums are higher than term life plans and most universal life plans. The excess portion of the payments, which is the amount over the cost of insurance, is put into a savings account or accumulation reserve account that accumulates or builds up with interest. It is this overpayment in the early years which enables the policy to have level premiums for life, as well as build up loan, surrender, and nonforfeiture values.
- GUARANTEED CASH VALUE WITH TAX-DEFERRED GROWTH:
The ‘Accumulation Element’ or ‘Cash Value’ of whole life insurance plans are based on the premiums paid into the policy, and the amount of interest guaranteed on the accumulation account. Guaranteed cash values are not usually available until the second or third year of the policy due to the cost to the company of underwriting, issuing, and paying the work force to put the policy on the books. The Cash Value account accumulates tax-deferred, and in many cases tax-free.
- DIVIDENDS; PAID UP ADDITIONS; AND PAID-UP POLICIES:
As stated earlier, all highly regarded life insurance companies will participate into their permanent life insurance plans above the guaranteed cash value amount. For reasons of law and an unforeseeable economic collapse, the policy will state that dividends are not guaranteed. However, for the highly rated and multi-billion dollar insurers their history of dividend payments will show that most have paid dividends to their permanent life insurance policyowners for decades, even through times of market crisis. The dividends can be taken as cash. Yet, they are normally paid into the policy to accumulate at interest tax-deferred, and they also have two other important values. Dividends can purchase either additional term insurance or paid-up additional death benefits. Additionally, dividends can be used to stop paying early on a permanent policy – though by law it is not a ‘paid-up’ policy, if the dividends continue into the policy as scheduled, then in many cases no more payments are necessary (this process typically takes 15 to 25 years).
- PROTECTION AND NON-FORFEITURE VALUES:
In many states life insurance policies and their values are protected from creditors. By law, in every state of the US, life insurance policies have non-forfeiture values. They will be listed near the front of your policy. The NAIC (National Association of Insurance Commissioners) Standard Nonforfeiture Law for Life Insurance is a guideline used by most states. Nonforfeiture values in a life insurance policy are values protected by law that cannot be forfeited even if the policyowner ceases to pay the premiums. These benefits include: cash surrender value, loan value, paid-up insurance, and extended term insurance. If a policy lapses and the policyowner does not choose a nonforfeiture option, typically the insurer will place them on extended term insurance.
- TAX-FREE WITHDRAWALS AND DEATH BENEFITS:
The death benefit is guaranteed to never be less than the face amount of the policy less any policy loans and interest. However, most modern whole life policies, in which the dividends are placed into the policy, will have scheduled death benefits that may increase as much as two or three times initial face amount. Additionally, the portion of any cash withdrawals is normally tax-free until the withdrawal exceeds the premiums paid into the policy. And unless the estate is named beneficiary, normally the death benefit of a life insurance plan is tax-free.
Most life insurance policies have riders or additional available amendments to the standard policy contract. A rider is an amendment or endorsement to an insurance policy, which for an extra premium gives the policyowner extra benefits or options. Examples include children insurance riders, living benefits, coverage for other insureds, accidental death benefit, term riders, and waiver of premium.
- FOR MORE INFORMATION (see the following articles):
Whole Insurance Riders – This link explains the additional benefits or optional ‘Riders’ available for most whole life insurance plans.
Permanent Life Insurance – This link explains the nature of permanent or cash value life insurance plans.
Advantages & Disadvantages of Whole Life Insurance – This link addresses the most important advantages and disadvantages of whole life insurance plans.
What policy should I buy? – This link may help you decide which life insurance product is the best for you.