An important feature of whole life insurance that is not associated with term life insurance is that a whole life policy includes an investment component which accumulates ‘cash value’ and increases over time based on earned interest.
A whole life policy’s Cash Value is considered a ‘living benefit,’ allowing the policyowner to take out a loan from the life insurer against the policy’s accumulated cash value, or use it as collateral on a loan.
With a whole life policy, a portion of the premium pays for the insurance and the rest accumulates tax deferred in a cash value account. The policyowner can borrow against the cash value, and technically is not required to repay the loan; however, any unpaid loans on the policy’s cash value equally reduce the death benefit of the policy.
Whole life insurance policies also include a ‘cash surrender’ value, called the Nonforfeiture Value, allowing the policyowner to recover part of the premium invested in the policy if he or she stops making premium payments and forfeits ownership of the policy.
Whole Life Policy Maturity at Age 100
Compared to term life insurance which provides coverage for a specified period of time, whole life insurance covers the whole life of the insured. However, whole life insurance matures at age 100, meaning that once the insured has reached age 100, his or her policy is considered to be paid in full and the insurer’s obligation to provide coverage ends.
Each insurer employs statistical analysts, or ‘actuaries,’ to analyze and predict potential loss in order to set and maintain premium pricing for the insurer’s products. Although an insured can live past 100, statistically speaking, such a low percentage of individuals actually do that mortality tables predict loss only up to this age.
Whole life premium rates are based on the policy’s maturity at age 100, which is also the age in which the policy’s cash value has accumulated to the face amount of the policy. Upon reaching age 100, the insurer provides the policy’s full face amount (the policy’s accumulated cash value) to the policy’s owner or designated beneficiary.
Whole Life Insurance Policies
As with term life insurance, whole life policies vary in how premiums are paid into the policy, whether it be a continuous premium, referred to as ‘straight life,’ limited payments or a single payment. In addition, whole life insurance policies can be based on current interest rate trends, or combined with term life insurance to provide consumers with a more affordable alternative to traditional straight life policies. The following types of whole life insurance policies include:
Continuous Premium (Straight Life)
- Limited Payment
- Single Premium
- Current Assumption
‘Economatic’ Policy
Continuous Premium (Straight Life)Considered to be the most common type of whole life insurance sold, a policyowner stretches his or her premium installments over the life of the policy (to age 100 or death, whichever comes first). Premium installments are both continuous and level throughout the policyowner’s life.
Limited Payment
Premium installments are paid for a limited period of time while guaranteeing coverage for the life of the policyowner. Since the premiums are paid over a shorter period of time, the premium payments will be higher than under an ordinary whole life policy. Cash values also build quicker than straight life policies.
Limited-payment policies are based on a predetermined number of years such as a 20-payment (20-pay) or 30-payment (30-pay) policy, or are based on age such as a ‘Life paid up at age 65’ policy. While life insurance continues on the insured until death (or age 100), the policyowner is limited in payments towards the life policy.
Single Premium
A type of limited-payment whole life policy with a single lump-sum premium payment which is payable at the time the policy is issued. Though it is a large initial expense, overall it is less expensive than the accumulation of periodic installments over the life of the policy.
Current Assumption
Also known as Interest-Sensitive Whole Life, this type of policy differs from an ordinary whole life policy where premiums remain level. With a current assumption whole life policy, premium payments are flexible and can increase or decrease by the insurer (annually) based on current interest rate trends that result in higher or lower mortality rates or investment returns to the insurer. When an insurer experiences high rates of return, premium rates are generally reduced. When the insurer experiences lower than average rates of return, premium rates are generally increased. Premium adjustments are usually made on an annual basis to compensate for this market fluctuation.
‘Economatic’ Policy
Also known as Enhanced Ordinary Life or Extra Ordinary Life, this insurance option, offered by some mutual companies, allows a policyowner to maintain a higher insurance death benefit at a lower premium through the combination of a whole life and term life policy.
Example:
Let’s say that a policyowner wants to purchase a $250,000 whole life policy but cannot afford the required premium. He or she could simply purchase a level or decreasing term life policy in addition to a lesser face value whole life policy.
Considering that term life insurance is less costly than whole life insurance, the policyowner could purchase a $150,000 whole life policy and also purchase a $100,000 term life policy with a combined death benefit of the desired $250,000. Since $100,000 of the death benefit is under a term life policy, which is cheaper than a $100,000 whole life policy, the overall cost of the combined whole life and term life premiums equate to less than a straight $250,000 whole life policy.
As the whole life policy matures, dividends paid to the policyowner from the whole life policy will be used to purchase paid-up additions to the whole life policy, and at the same time, the policyowner will decrease the face amount of the term life policy so that the policyowner never exceeds a combined $250,000 death benefit.
Eventually, the term life policy will decrease to zero and the dividends from the whole life policy will allow the policyowner to purchase enough paid-up additional insurance so that the whole life policy equals the desired $250,000.
Essentially, this type of affordable whole and term life insurance option allows a policyowner to purchase a larger overall death benefit at a more affordable rate than a straight life policy.
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