Learn How Whole Life Insurance Works
Whole life insurance can be considered the foundation on which permanent life insurance is built.
There are many variations of the permanent life insurance policy but they are all based on the whole life policy…
The whole life policy can also be considered an endowment to age 100. The premium paid purchases a specific death benefit and produces a specific cash value which are guaranteed as long as you choose to keep the policy in force.
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Whole life premiums are higher than term life premiums and are guaranteed to remain level for as long as you own your policy.
- Non Participating Policies
There are two basic types of whole life insurance policies. First, there is the non-participating whole life policy which has cash values but do not participate in dividends earned by the company.
- Participating Policies
The second type is the participating whole life insurance policy which does participate in the expense, investment and mortality experience of the life insurance company. These whole life insurance policies have cash values and earn dividends. Dividends are not guaranteed.
- Cash Values
Whole life policies have cash values which are available to you if you should have a need for additional cash. It can also be used to provide additional income at retirement.
The purpose of any type of life insurance is protection in the event of premature death. More often than not you buy these policies for family protection. One of the additional benefits of whole life is that the cash values and dividends accumulate tax deferred.
Let us suppose the cash values are used to provide a retirement income, when you receive the income you will likely be paying income taxes at a lower rate than the rate you would be paying while you were funding the plan. Tax free accumulation of your cash values and dividends is therefore a plus factor.
- Death Benefit
The guaranteed death benefit of a whole life policy can be paid to your beneficiary in one lump sum or in the form of a monthly income. It can be used to protect a family in the event of the death of a breadwinner or for business insurance purposes.
- Buy-Sell Agreements
When partners or small corporation owners have a buy-sell agreement and one of the partners or shareholders dies the survivors can use the proceeds of the policy to purchase the deceased partners shares. This allows them to maintain control of the company. Term life insurance can be used for this purpose but many business people use whole life because it lasts for ever…so to speak.
- Key Employees
Whole life can be used for coverage on a key employee. In the case of the premature death of this key person the proceeds are paid to the the company. This policy is used as a cushion to help the business maintain their operations without any financial problems while they find a replacement.
- Estate Taxes
Whole life insurance can be used to pay estate taxes due on the estate of a deceased person…thus leaving the estate in tact for the heirs…allowing it to be passed on free and clear.
- Policy Loans
As previously mentioned…whole life policies build cash values which can be accessed by the insured in an emergency. The owner of the policy can take a loan from the life insurance company. This loan can be repaid at the convenience of the policy owner.
Although this loan need not be repaid it is recommended that you do repay it as the death benefit will be reduced by the outstanding amount…and the cash value will be much less in later years. Interest is also charged on the unpaid balance.
- Mortgage Redemption And Cancellation
Whole life insurance can be used for mortgage redemption or mortgage cancellation. At some point the balance owed on the mortgage of a house, or any piece of property with a mortgage, will become equal to the cash value of the policy. The cash can be taken from the policy and used to pay off the mortgage.
These policies are usually specifically targeted to this specific event, even though any life policy with sufficient anticipated cash value can be used.
- College Education
A policy owner can plan and use a whole life insurance policy to fund college education for children.
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