Whole Life insurance policies are a traditional form of life insurance policy. With this life insurance policy, the premiums stay the same over the life of the policy. Whole life insurance pays a death benefit to the beneficiary you name and offers a cash value account and tax-deferred cash accumulation. The policy remains in force during your entire lifetime and provides permanent protection for your dependents while building a cash value account. The insurance company manages your policy's cash accounts.
With Whole Life insurance, part of your premium goes toward the insurance portion of your policy, a small part of your premium goes toward administrative expenses, and the balance of your premium goes toward the investment or cash portion of your policy.
The Whole Life policy provides insurance coverage for the entire life of the insured regardless of how many years premium is paid. Premiums may be paid throughout the insured's entire life or for a portion of his life (e.g. 10 years, 20 years, 30 years). Additionally, premiums can be paid in one lump sum when the policy is taken out. This is referred to as a single premium whole life policy. Ordinary, or straight life insurance, is how the policy is referred to if the insured pays premiums throughout his entire life. Limited Life insurance, is how the policy is referred to when premiums are to be paid over a specified period of time (e.g. 30 years or until age 65).
The cash value portion of Whole Life insurance belongs to the insured. You can take it out in the form of policy loans or you can cash the policy in. An advantage to Whole Life is that the interest you accumulate through the investment portion of your policy is tax free until you withdraw it. Another advantage of Whole Life insurance is that the premiums are fixed. Regardless of your age or health, you pay the same amount for the coverage each year.
The premiums are higher for Whole Life insurance as opposed to term life insurance. In fact, they are substantially higher. The reason for this is that the policy has investment features as well as death benefits. Another thing to keep in mind is that the cash portion of your policy builds up slowly during the first several years because most of the premium goes to cover commissions and administrative expenses. Because of the slow build-up of cash in the policy, it is not recommended that this type of policy be purchased if the insured is going to hold it for five years or less.
One drawback to a Whole Life policy is that the investment vehicles in the insurance company's portfolio dedicated to whole life are generally bonds and mortgages. These types of investments carry substantial interest rate risk.
