Post No. 9: Whole Life Insurance

Whole Life Insurance is a kind of coverage under the Ordinary Life Insurance policies.

“Life insurers issue three basic kinds of coverage: ordinary insurance, industrial insurance, and group insurance. Whole Life Insurances

Ordinary life insurance is individual life insurance that includes many types of temporary (term) and permanent (whole life, endowment, universal life, variable universal life, and other interest-sensitive cash value plans).

Whole life insurance ( also known as permanent or cash value insurance) is so called because it provides permanent protection for the whole life- from the date of issue to the date of the insured’s death, provided premiums are paid. The benefit payable is the face amount of the policy, which remains constant throughout the policy’s life. Premiums are set at the time of policy issue, and they too remain level for the policy’s life.

Unlike term insurance, which provides only death protection, whole life insurance combines insurance protection with a savings or accumulation element. This accumulation, commonly referred to as the policy’s cash value, builds over the life of the policy. This is because whole life insurance plans are credited with a certain guaranteed rate of interest; this interest is credited to the policy on a regular basis and grows over time.

Though it is an important part of funding the policy, the cash value is often regarded as a savings element because it represents the amount of money the policyowner will receive if the policy is ever cancelled. It is often called the cash surrender value. This value is a result of the way premiums are calculated and interest is paid, as well as the policy reserves that build this system.

The amount of a policy’s cash value depends on  a variety of factors, including:

• The face amount of the policy
• The duration and amount of the premium payments; and
• How long the policy has been in force.

Generally speaking, the larger the face amount of the policy, the larger the cash values; the shorter the premium-payment period, the quicker the cash values grow; and the longer the policy has been in force, the greater the build-up in cash values. The reason for these things can be clarified with an understanding of the maturity of a whole life policy.

Whole life insurance is designed to mature at age 100. The significance of age 100 is that, as an actuarial assumption, every insured is presumed to be dead by then. At age 100, the cash value of the policy has accumulated to the point that it equals the face amount of the policy, as it was actuarially designed to do. No more premiums are owed; the policy is completely paid up.

Another unique feature of whole life insurance is the living benefits it can provide. Through the cash value accumulation build-up in the policy, a policyowner has a ready source of funds that may be borrowed at reasonable rate of interest. These funds may be used for a personal or business emergency. It is not a requirement of the policy that the loan be repaid. However, if a loan is outstanding at the time the insured dies, the amount of the loan plus any interest due will be subtracted from the death benefit before it is paid. Indeed, policy loans are more like benefit advances than loans. In addition, because life insurance is considered property with a quantifiable cash value, it may be used as collateral or security for loans. Also, the policyowner may draw on the cash value to supplement retirement income. Cash values belong to the policyowner. The insurance company cannot lay claim to these values.

Whole life is actuarially designed as if the insured will live to age 100. Accordingly, the amount of premium for a whole life policy is calculated, in part, on the basis of the number of years between the insured’s age at issue and age 100.  This time span represents the full premium-paying period, with the amount of the premium spread equally over that period. This is known as the level premium approach.

Three notables forms of whole life plans are straight whole life, limited pay whole life, and single-premium whole life.

Straight Whole Life is whole insurance providing permanent level protection with level premiums from the time the policy is issued until the insured’s death (or age 100).

Limited pay Whole life policies have level premiums that are limited to a certain period (less than life). This period can be of any duration. For example, a 20-pay life policy is one in which premiums are payable for 20 years from the policy’s inception, after which no more premiums are owed.

Single-Premium Whole Life policy involves a large one-time- only premium payment at the beginning of the policy period. From that point, the policy is completely paid for.

There are many other forms of whole life insurance, most of which are characterized by some variation in the way the premium is paid. Some of them are Modified Whole Life, Graded Premium Whole life, Minimum Deposit Whole life, Indeterminate Premium Whole Life and Indexed Whole life.

Modified Whole Life policies are distinguished by premiums that are lower than typical whole life premiums during the first few years (usually five) and then higher than typical thereafter. The purpose of these policies is to make the initial purchase of permanent insurance easier and more attractive, especially for individuals who have limited financial resources, but the promise of an improved financial position in the future. Actuarially, the premiums are equivalent to standard whole life policies.

Graded Premium Whole Life. Similar to modified whole life, graded premium policies also redistribute the premiums. Premiums are lower than typical whole life rates during the preliminary period following issue (usually five to ten years) and increase each year until leveling off after the preliminary period. Again, the premium rates are actuarially equivalent to standard whole life.

Minimum Deposit Whole Life. Minimum deposit insurance begins building cash values immediately upon payment of the first premium. From that point, the policyowner systematically borrows from the cash value to pay some or all the premium.

Indeterminate Premium Whole Life are those in which the premium rate can be adjusted based on the insurance company’s anticipated future experience. The maximum premium that the insurer can charge is stated in the contract, through the premium payable at; issue is much lower and is fixed at the lower rate for a specified initial period (typically two to three years). After the initial period, and based on the company’s expected mortality, expense, and investment projections, the premium may be raised, kept the same, or lowered.

Indexed whole Life. The face amount of indexed whole life insurance automatically increases as the Consumer Price Index (CPI) increases. Two basic pricing methods are used with this type of policy:

• The policyowner assumes the risk of future increases and thus must pay additional premium with each face amount increase; or
• The insurer assumes the risk and thus the policyowner does not pay a higher premium with face amount increases.

Regardless of the method used, the policyowner is not required to furnish evidence of insurability to obtain the face amount increase.”

(Extracted from Life, Health and Variable Annuity. Florida Study Manual I Study Manual. Prepared by the National Association of Insurance and Financial Advisors. 2012).