Whole Life Insurance
Whole life insurance refers to a policy that provides lifetime protection by paying a lump sum death benefit. Whole life policies differ from term insurance in that they have a savings component with earning accruing referred to as cash value. With this type of insurance a policy holder may take loans against the cash value which usually have a minimum guaranteed rate of interest. As with most life policies, whole life may be participating or non-participating.
Cash values are considered liquid enough to be used for investment collateral and are tax-free up to the point of total premiums paid. If the insured dies, the death benefit is reduced by any outstanding loans. Premiums payable may be a single payment or fixed periodic (monthly) payment that is payable for the life of the owner or in most cases until the insured reaches age 100.
Different Types of Whole Life Insurance
Whole Life: The face amount remains constant for life while the premiums are paid until age 100.
Limited Pay: The face amount remains constant while the premiums are paid for a specified term (20 years).
Current Assumption Whole Life (CAWL): Hybrid between traditional whole life and universal life with level and fixed premiums. A person would want CAWL for fixed premiums, "forced savings" feature of whole life and the potential for better investment results than those guaranteed in traditional policies.
Variable Life: This policy is going to be more risky because of the variable investment feature with no guarantee of cash build up. The premium remains constant but the face amount may vary. The investment options under these types of policies may vary and benefits depend on investment performance.
Variable Premium Whole Life: Flexible Premium UL allows the policyholder to determine how much they wish to pay in premiums. In addition, Variable premium UL offers two different death benefit options: 1. Universal A- Level death benefit 2. Universal B- Increasing death benefit
Variable Universal Life: Variable universal life is a type of permanent insurance that combines death benefit protection with the opportunity to direct the investments into a broad selection of investment options. Variable universal life can fulfill two needs in one financial vehicle: death benefit protection and savings accumulation.
Joint and Survivor: Joint life and survivor insurance is a type of life insurance coverage for more than one person, typically couples. With joint life and survivor insurance, benefits are not paid until both of the policyholders have died. Lower premiums exist on these policies than on individual life policies because of the potential for a much longer period of time before the policy is called upon to pay benefits. Joint life and survivorship insurance is a tool often used to help pay estate taxes, because estate taxes can be delayed until both husband and wife die.
This can take two different forms; first-to-die or second-to-die with death benefits taking place at first or second deaths.
Family Income Policies: These policies are a combination of decreasing term and a form of whole life where the term insurance provides a monthly payment from the insured's death to some point in the future.
Modified Whole Life: During the first five years, the premium is slightly more than a term life premium, and then the premium increases to slightly above what a whole life premium would have been at original purchase.
Graded premium Whole Life: Policy that starts with a low initial premium and gradually increases annually or until it levels out.
Vanishing Premium: A participating whole life policy whose dividends are expected to cover all future premium payments.
Single Premium Life: Paid for by insured/owner in one single premium payment to pay a future benefit in the case of death. May have unfavorable tax consequences if it does not meet the 7-pay test required by the IRS. This may result in the policy being classified as a MEC (modified endowment contract) thus subjecting it to taxable income and possible early withdrawal penalties.
Credit Life: Credit life insurance pays the insured balance of your loan, up to the policy maximum, in the event of your death. This ensures your family will not be left with your loan debt and protects the lender from financial loss in the case of death before completing a loan debt.