Types of Whole Life Insurance
When the insurance business originally started, all life insurance was term life insurance. And this is the type of life insurance that we highly recommend in most cases. But as the insurance industry matured, whole life insurance was invented. Some say that whole life was created in response to market pressures, because some term insurance policyholders were not happy that they could be paying premiums for decades and accumulating no value they could cash in on if need be. But, the profitability of whole life insurance to the industry, and to insurance brokers, makes us think otherwise.
With term life insurance, your premiums may rise as you get older. With whole life insurance, while your premiums are higher than they would be with term life, they remain level over time. And, the policy covers insured’s “whole life,” meaning until your death. The premiums accumulate a cash value that, if the policyholder wishes to terminate the policy, he or she can be paid from the insurance company. Along the way, the whole life policyholder may borrow against the policy, usually with somewhat lower than market interest rates.
The whole life insurance policy offers a ”cash value,” which is a cash reserve that builds over time until it equals the “death benefit.” The cash value equals the death benefit upon maturity of the contract, usually near the age of around 100.
The other major difference between a life and term life is that whole life has an investment component. They’re taking a portion of your money and investing it in stocks, bonds and other investment vehicles. So, they are not just your insurance company, they become your investment partner as well. If they are good investors and beat the market (most money managers do not), you profit too; if they don’t, it’s your loss too. Some people may like this hands-off approach, and some may not.
There are many types of whole life insurance. Here are just eight popular ones:
Nonparticipating whole life insurance: at the time the policy is written, everything relating to the policy is determined and remains in effect for the life of the contract. This includes death benefits, premiums, cash surrender values, everything. No changes are allowed at all.
Participating whole life insurance: as the whole life insurance company is your investing partner, you are paid dividends if there are profits from year to year.
Intermediate premium whole life insurance: this is just like non-participating whole life insurance, except that your premium payments are not level for the life of the contract. However, there is a maximum premium that they cannot exceed.
Economic whole life insurance: this is a hybrid of a life insurance and term life insurance. Part of the surplus premium is used to purchase term insurance.
Limited pay whole life insurance: this is like whole life insurance except you make larger premium payments, but for a set number of years, for example 20 years instead of your whole life.
Single premium whole life insurance: rather than making payments for your whole life, you make one very large payment upfront.
Interest sensitive all life insurance: instead of using dividends to increase your cash value accumulation, the interest on your policies cash value changes with market conditions. Your premium can vary up to a maximum guaranteed amount, but your death benefit will remain the same.
Modified life-insurance: this is a whole life insurance policy that, rather than having level premiums for life, the early years see lower premiums, and step up through the life of the loan. Generally, there are two or three steps.
As you can see, whole life insurance can be extremely complex, and in our opinion, this works to the benefit of the insurance company, not the insured. Unless you have estate planning needs that require whole life insurance, stick to term life, and use 401Ks and IRA’s to as your investments.