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Benefits of Whole Life Insurance |
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Whole Life Insurance is a life insurance policy that remains in force for the insured's whole life and requires (in most cases) premiums to be paid every year into the policy.
With Whole Life insurance, part of the premium is applied toward the insurance portion of the policy, a small part of the premium goes toward administrative expenses, and the balance of the premium goes toward the investment or cash portion of the policy.
One of the benefits of this type of policy is that the cash value portion of Whole Life insurance belongs to the insured. This can be in the form of policy loans or by cashing in the policy. An advantage to Whole Life is that the interest accumulated is tax free.
The cash value can be used to pay premiums. The cash value in the policy can be used toward the premium payment to continue current insurance protection – providing there is enough money accumulated.
Another advantage of Whole Life insurance is that the premiums are fixed. Regardless of age or health, the insured has to pay the same amount for the coverage each year.
New York State defines six traditional forms:
- Non-Participating: All values related to the policy (death benefits, cash surrender values, premiums) are usually determined at policy issue, for the life of the contract, and usually cannot be altered after issue.
- Participating: In a participating policy the insurance company shares the excess profits with the policyholder. The greater the success of the company's performance, the greater will be the dividend.
- Indeterminate Premium: It is similar to non-participating, except that the premium may vary year to year. However, the premium will never exceed the maximum premium guaranteed in the policy.
- Economic: It is a mix of participating and term life insurance. A portion of the dividends is used to purchase additional term insurance. This can generally yield a higher death benefit, at a cost to long term cash value.
- Limited Pay: Similar to a participating policy, but instead of paying annual premiums for life, they are only due for a certain number of years, such as 20. The policy itself continues for the life of the insured. These policies would typically cost more up front, since the insurance company needs to build up sufficient cash value within the policy during the payment years to fund the policy for the remainder of the insured's life. Single Premium: It is a form of limited pay where the pay period is a single large payment up front. These policies typically have fees during early policy years should the policyholder cash it in.
- Interest Sensitive: This type is new, and is also known as either excess interest or current assumption whole life. The policies are a mixture of traditional whole life and universal life. Instead of using dividends to augment guaranteed cash value accumulation, the interest on the policy's cash value varies with current market conditions. Like whole life, death benefit remains constant for life. Like universal life, the premium payment might vary, but not above the maximum premium guaranteed within the policy.
This article was contributed by Prerna Mordani.
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