Whole life insurance

Whole life insurance, or whole of life assurance (in the Commonwealth of Nations), sometimes called "straight life" or "ordinary life," is a life insurance policy which is guaranteed to remain in force for the insured's entire lifetime, provided required premiums are paid, or to the maturity date. As a life insurance policy it represents a contract between the insured and insurer that as long as the contract terms are met, the insurer will pay the death benefit of the policy to the policy's beneficiaries when the insured dies. Because whole life policies are guaranteed to remain in force as long as the required premiums are paid, the premiums are typically much higher than those of term life insurance where the premium is fixed only for a limited term. Whole life premiums are fixed, based on the age of issue, and usually do not increase with age. The insured party normally pays premiums until death, except for limited pay policies which may be paid-up in 10 years, 20 years, or at age 65. Whole life insurance belongs to the cash value category of life insurance, which also includes universal life, variable life, and endowment policies.

Death benefit

The death benefit of a whole life policy is normally the stated face amount. However, if the policy is "participating", the death benefit will be increased by any accumulated dividend values and/or decreased by any outstanding policy loans. (see example below) Certain riders, such as Accidental Death benefit may exist, which would potentially increase the benefit.

In contrast, universal life policies (a flexible premium whole life substitute) may be structured to pay cash values in addition to the face amount, but usually do not guarantee lifetime coverage in such cases.

Maturity

A whole life policy is said to "mature" at death or the maturity age of 100, whichever comes first. To be more exact the maturity date will be the "policy anniversary nearest age 100". The policy becomes a "matured endowment" when the insured person lives past the stated maturity age. In that event the policy owner receives the face amount in cash. With many modern whole life policies, issued since approximately 2000, maturity ages have been increased to 120. Increased maturity ages have the advantage of preserving the tax-free nature of the death benefit. In contrast, a matured endowment may have substantial tax obligations.

Uses

Personal and family uses

Individuals may find whole life attractive because it offers coverage for an indeterminate length of time. It is the dominant choice for insuring so-called "permanent" insurance needs, including:

• Funeral expenses,
• Estate planning,
• Surviving spouse income, and
• Supplemental retirement income.

Individuals may find whole life less attractive, due to the relatively high premiums, for insuring:

• Large debts,
• Temporary needs, such as children's dependency years,
• Young families with large needs and limited income.

In the second category, term life is generally considered more suitable and has played an increasingly larger role in recent years.

Business uses

Businesses may also have legitimate and compelling needs, including funding of:

• Buy-sell agreements
• Death of key person
• Supplemental executive retirement plans (S.E.R.P.)
• Deferred compensation

While Term life may be suitable for Buy-Sell agreements and Key Person indemnification, cash value insurance is almost exclusively for Deferred Comp and S.E.R.P.'s.

See also

• Buy term and invest the difference
• Life insurance
• Permanent life insurance
• Theory of Decreasing Responsibility