Whole life Insurance, or permanent life insurance, is a life insurance policy that remains in force for the insured’s whole life and requires yearly premiums to be paid into the policy. Whole life insurance gives the policy holder a guaranteed death benefit with a cash value that builds up with a percentage of the yearly premiums paid, plus interest.
But because whole life insurance has a guaranteed death benefit that is paid out to each policy holder eventually, they need to charge a higher premium to ensure that the insurance company continues to make a profit. Whole life insurance companies can charge as much as 30% overcharge which translates into pure profit for the company, but policy holders have the peace of mind knowing that their monthly payments are being accrued in part for a hefty death benefit in the end.
Types of Whole Life Insurance
In the United States there are five types of whole life insurance policies which will vary by rate and benefits. These include non-participating, participating, indeterminate premium, economic limited pay, and single premium. Each of these is explained below.
Non- participating is a whole life insurance policy that has the death benefits, premiums and cash surrender values all determined at the initial signing of the contract. This means that once you lock into the contract nothing can be altered for the life of the agreement. The benefit, or potential drawback of this agreement, is that insurance rates cannot be raised, even if market prices are going up. But at the same time if the market lowers the insurer is stuck paying the higher price. Yet not to worry; if future claims are underestimated the insurance company makes up the difference.
Participating whole life insurance usually implies a portion of ownership in the policy by the policyholder. This means that the insurance company shares any excess profits with the tax holder, and are usually referred to as over payment refunds.
This is essentially the same policy as the non-participating, with one variance: the premium can change each year according to market trends, provided that it doesn’t exceed the set maximum premium outlined in the whole life insurance contract.
Economic Limited Pay
This is a blend of both participating whole life insurance and term life insurance. In this type of policy the policyholder makes regular premium payments and a portion of the money is used to purchase additional term insurance. This means that if the policyholder dies during the years where additional term insurance is purchased they can yield a much higher benefit, and if not when the term insurance is up the death benefit will decrease back to include just the stipulated whole life insurance rate.
In the single premium whole life insurance policy the policyholder makes a large premium payment upfront that allows them to have lower yearly premiums, or perhaps no additional premiums at all. These policies typically have fees during early policy years should the policyholder cash it in.