Whole Life Products

The insurance element of a whole life policy is virtually identical to the insurance provided by a decreasing term policy. The concepts of "level protection" and "permanent insurance" are misleading, because every whole life policy is a combination of a savings plan and an amount of insurance, which is decreasing over time.

Because whole life policies include both insurance and savings, they are often part of a long-range financial plan. They provide a level of safety, since the face value, cash value, and the rate of interest earned on cash value are all guaranteed by the insurance company. In some cases, whole life insurance can be used to provide both life insurance protection and savings for retirement or other purposes. In other cases, it is used as a base, to provide guaranteed security supplemented by other forms of protection and/or savings and investment.

General Characters of Whole Life Insurance

Whole life contracts may be characterized by a number of policy features relating to premiums, death benefits, and other policy values.

Level Premiums

Premiums for whole life policies are level and guaranteed for the life of the contract. Level premiums are achieved by charging more than the actual mortality cost during the early years of the contract, and using these extra premium funds, interest earned on them to compensate for the increasing mortality costs during the later years. The policyholder will pay the same annual premiums for as long as the policy remains in effect. If the insured is still alive at age 100, the face amount of insurance is paid to the policyowner at that time (the policy is said to endow).

Permanent Protection

Whole life insurance is often called "permanent insurance" because the death benefit remains the same throughout a person's life. In reality, many consumers who purchase whole life insurance use the cash value for retirement income or some other purpose prior to death or policy maturity.

A whole life policy actually consists of a combination of a savings element (the increasing cash value) and a decreasing amount of insur ance protection (the difference between the cash value and the face amount). If a whole life policy actually reaches its maturity date, the cash value equals the face amount and the net insurance protection would have declined to zero.

Cash Value

Whole life policies include a cash value, or savings, element in addition to the element of pure insurance protection. This value increases during the life of the contract until, if it is held long enough (usually age 100), it equals the face value and the policy matures (in which case, the cash value becomes payable as a living benefit). A policy may also be surrendered for its cash value, or all or a portion of the cash value may be borrowed, at any time prior to the maturity date. Interest charges are assessed on any policy loans, and unpaid loans are deducted from the death benefit.

A cash value is a fund that accumulates in a whole life insurance policy, which the policyowner can access in several ways while still alive. While the cash value is an integral part of the policy's funding, it is also a nonforfeitable asset of the policyowner. If and when a whole life policy is canceled or surrendered, the owner is entitled to receive the cash value by one of three nonforfeiture options.

Using Cash Value

There are many situations in which a ready source of cash is needed. The life contract could be used to store funds at competitive current interest rates until a need arises. If the need never arises, the accumulated cash could be used to fund growth opportunities, or even retirement. Life insurance may be used as a means of providing funds for the purpose of buying out an interest in a partnership or close corporation, or to allow a sole proprietor to retire while the business is operated by an heir.

The General Account: The Foundation of Guaranteed Values

For fully guaranteed contracts (such as whole life insurance), an insurer maintains a general account which consists primarily of safe and conservative investments (such as high grade bonds, real estate, and certificates of deposit). The safety of these investments makes it possible for the insurer to guarantee its policies.