Whole Life Insurance
Whole Life
When compare with term insurance, which expires and must be rewarded periodically, whole life has no term or years. There is no need to renew it. The policy will stay in force as long as the policy owner pays the premium on schedule.
The characteristic of a whole life insurance are:
- level premium
- level force of amount
- guaranteed value
- relatively high degree of safety
One important feature of the whole life insurance policy is that it builds up cash value over a period of time. As the policy owner continues to make premium payments the cash value on the policy gradually increase. The cash value accumulates based on the premium the owner pays and also the interest rate the company credits to the policy's accumulated cash. The amount of coverage, the age at purchasing the policy will determine the premium the person will pay according to schedule.
Beside building up cash value as a safety act, whole life insurance also provide other options that are not available for term insurance. These options are:
- Borrowing on the whole life policy. Since this is a cash building policy, it increases in the amount of the cash over the life of the policy. Many will view this as a forced savings. The policy owner may find himself in a needs of cash. Rather than paying a high interest loan rate from a bank, the owner of the policy can borrow all or a portion of the cash value against the policy. The loan is normally given at a lower interest rate than what the bank will charge. Although there is no date on which the loan must be repaid, the owner of the policy will be charged interest sp long as the loan remains outstanding. Remember, if the owner dies before paying back the loan, the beneficiary only receives the amount minus the loan and interest (eg. with a $100,000 policy, a $10,000 loan and interest outstanding, the death benefit paid to the beneficiary will under $90,000)
- Withdraw the cash clue : The cash value is guaranteed which means the owner can withdraw the cash value when he chooses to stop paying the premium and cancek the life insurance coverage. The amount of cash value will depend on the length of time the owner has been paying premiums.
- Trade in another policy: With the changing finances you have, the policy owner might decide that he no longer is in need of the whole life insurance. Rather than loosing the protection he can instruct the company to utilize the cash clue to pay premiums on a term policy that has the same coverage as the cash value policy. The more cash value on the policy has accumulated the longer the term insurance will last.
Types of whole life polices:
When the sales person says that they have different products to tailor the owners needs, in fact it is quite true. Cash value policies do have several types to offer. Some policies require premium payments throughout the owner's lifetime. Other policies specify a fixed number of payments.
The different products for whole life insurance policy are:
Single Premium Life insurance - At the time of purchase, the owner is required to pay a single relatively large premium and no other payment is required to keep the insurance in force. This product is getting a lot of play these days is because the tax-free buildup of the cash value. The insurance company normally guarantee that the policy owner will earn a specific interest rate. The whole idea for this product is to build cash value as quickly as possible. Most people chose this product as a tool to build up cash for their children's education. Since the cash value accumulates faster than a regular policy, the owner can start borrowing usually after having the policy for two years. If the loan is outstanding, and the owner of the policy dies, the death proceeds to the beneficiary is the face values of the policy minus the loan and interest. However any money remaining in the cash value that has not been borrowed is added to the force amount of the policy and the beneficiary gets the full amount.
Variable Life - The cash value for this policy is affected by investments, while the death benefit is fixed, minimum amount. The insurance company offers the policy owner the option of investing the cash value portion of the account in stocks, bonds, mutual funds, or a combination of all of them. Like the other policies, the owner can borrow against the cash value. A caution to this life insurance option is that if a stock or mutual funds goes down there is a possibility it will wipe out all your cash value of your insurance policy. If the insured has no knowledge in investment, this product should not purchase this product. The customer should also not purchase this product if they are depending on this policy to provide securely for their beneficiary.
Endowment Life Insurance - This policy emphasizes the cash value aspects of life insurance. The insured would buy this policy that matures or "endows" after a set number of years or when the insured reach a certain age. For example, if the policy owner buys and endowment with 20 years, at the end of that time he could get the face amount. If the insured dies before the 20 years was up, and has been paying the premium regularly, the beneficiary would receive the face amount. There will be no death benefits paid off if the insured lives the 20 years and collect on the policy. Endowment polices require very high annual premium that produce a rapid buildup of cash value. When the last premium is paid, the cash value and face value are equal.
Limited Payment Policies - The uniqueness of this policy is that the owner makes premium payments for a set number of years such as six, ten, or fifteen years. There is no need for any further payments after that period. When finishing the payments, the insured has fully paid the policy. The paid up policies continue to provide insurance coverage and also accumulate cash value. The fewer premiums on is required to pay, the higher the annual premium that will be charged. Paid-up at the 65 is the popular choice because individuals plan to retire and doesn't want the continuing obligation of life insurance premium.
Universal Life Insurance - In many ways this policy looks like a whole life policy, but it is more flexible. It combines a term insurance with an investment program that pays a return based on market rates of interest. After making a required initial premium payments, the insured can make future payments at any time and in any amount. With this flexibility, the insured can design how much of the payment should apply to the insurance part of the policy and how much to the cash value. The owner can even skip payments and the insurance company will pay for the insurance part of the policy out of the cash value. Keep one thing in mind, since the insurance company invest the owner's money for him, they do charge a high investment fee back to the insured. Also, most universal policies impose a surrender charge if the insured decides to cash in the policy. With investments based on the market rate and a heavy burden of fees and charges, the death benefits should be far less than promised when the policy is sold.
Beside large lump sum premium, these policies have a number of other drawbacks :
- If cash in the policy, all of the money that is invested in it, as well as the accumulated buildup will be fully taxable
- The insurance company will charge a loan fee each and everytime a loan is taken out. Those fees are then taken out of the cash value, so the return from the policy may end up less than the owner anticipated.
- With a guarantee interest rate( interest rate never changes), the owner may find himself loosing money if inflation should happen
- If the policy owner have to give up the policy within the first few years, he will have to pay hefty surrender fees based on a percentage of the cash value.