For a very long time the whole life insurance policy was the mainstay of the life insurance industry. In the beginning this was a non participating policy. All you needed to do was pay your premiums and the face amount of the whole life insurance policy would be paid to your beneficiary upon your death. People bought these policies, which were fairly small in size, mainly to pay off last expenses with an emphasis on funeral costs. They were actually tickled when they realized that they had built up a cash value after a few years from which they could take out a loan.
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The whole life insurance policy was such good business for the life insurance companies that they created the participating whole life policy which earned dividends for the policy owner. The premiums were a little higher than the non participating policy, but the dividends made the extra premiums worth it. For the sake of competition the life insurance companies used net cost as a measuring stick to decide which policy was best for their clients to buy. All an insurance company had to do to rank well was to slightly raise their premiums, pay a little higher dividend and they looked pretty good when compared with the competition.
Then came interest adjusted net cost as the new measuring stick. The competition got rough and other life insurance companies felt that this net cost thing should be based on performance and not just stacking the premiums. The companies got into a battle to see who could keep the premiums lowest for the whole life insurance policy and still pay the highest dividend. The policy owner was the winner in the long run. The life insurance agent made money beyond his fondest dreams.
Enter some smart people who realized what was happening, put their thinking caps on and figured out that it would be easier to sell term life insurance to the public rather than a whole life insurance policy because the term policy was cheaper. The 20 year term policy took off like a rocket, and term life insurance became the most sold policy.
The big question is which one should you buy? Each has it’s pros and cons. Term life insurance can be real cheap. This gives people an opportunity to buy a fairly large policy who would not be able to if they were buying a whole life policy. Term has no cash value and no dividend, so there is nothing to get back in the end. In addition it is always wise to eventually convert to a permanent life insurance policy as the term period may pass before you die, thus leaving you without any insurance.
The whole life insurance policy lasts for as long as you want to keep it. It is permanent life insurance. It has a cash value and a dividend which you can collect either in the form of a policy loan or upon surrender of the policy.
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