Whole Life Insurance
What is it?
Typically we think of whole life insurance when we discuss permanent insurance, however, there are other varieties such as Universal Life, Variable Life and Blended Life. In reality, permanent insurance refers to any protection that remains with you for your entire life, by design. Let’s talk about whole life insurance first.
Whole life insurance is an insurance contract that is designed to remain in force for life, hence it is known as a permanent policy. Originally, they were set up to stay in force (providing premiums were paid on time) to age 100, however, newer versions go to age 120. Premiums, death benefit and cash values are all guaranteed upon inception of the policy.
This insurance, because it stays with us longer than term policies, comes with a larger premium for like death benefits. For instance, a $100/month term premium will purchase much more death benefit than a $100/month whole life policy. There is also a cash value that may be used for personal purposes (although certain limitations may apply). Cash values grow by the guaranteed interest rate and there may be an additional non-guaranteed dividend as well if the policy is participating.
Generally, this formula is used for whole life calculations: premiums + guaranteed interest rate = death benefit at age 100. If dividends are paid on your policy (determined by and at the discretion of companies on an annual basis) the cash values will be larger than anticipated. In this case, death benefits are automatically increased as the original actuarial expectations have been exceeded. If this death benefit adjustment is not made, your policy may become too “cash rich”, reach the modified endowment contract status (MEC) and be subject to different tax rules.
There are several options for the use of dividends, however, purchasing additional insurance is the most common. Cash values take many years to accumulate as many expenses come out in the early years. Many people enjoy the relative safety of these products – guaranteed premiums, cash values and death benefits.
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