Whole Life Insurance

Whole life is also known as, or permanent insurance provides continued coverage from the time the contract begins throughout the policyholder’s life. Another aspect of whole life insurance that makes it stand apart from other options is that there is a savings component that allows a cash value to grow.

Did you know that whole life insurance is the most common of the various life insurance options? Perhaps this is because it guarantees that the beneficiaries receive a payment of a death benefit in exchange for regular premium payments.

 

What Does a Death Benefit Mean?


Whole life insurance policies guarantee that the policyholder’s beneficiaries receive what is called a death benefit upon the death of the policyholder. Now, depending on the policy that is taken out, some are eligible for what are called dividend payments. Dividend payments mean that the policyholder may elect to have the dividends purchase additional death benefits. These will increase the death benefit when the time comes. Alternatively, any and all outstanding loans that are taken out against the cash value will reduce the total death benefit. Now, numerous whole life insurance companies offer riders, these are put in place to protect the death benefit in the event the policyholder critically or terminally ill or disabled. Generally, riders include what are referred to as an accidental death benefit and waiver of premium riders.

 

It is important to know that the named beneficiaries do not have to include money received from a death benefit to their gross income when filing their taxes. That said, sometimes the owner of the policy may designate the funds from the whole life insurance policy be held in an account and distributed predetermined amounts. When this happens, it is vital that any and all interest earned on the holding account be reported by the beneficiary as it will be taxable. Taxes may also be assessed if the whole life insurance policy is sold before the owner passes away.

 

Explain the Cash Value Component of Whole Life Insurance


Being able to fully understand the cash value as it relates to cash value whole life insurance is critical to making an informed, decision that will best provide for your family. Cash value is a portion of your policy’s death benefit which has become liquid. This means that it is accessible while you are still alive. Now, this amount grows at different rates for different insurers – which is another reason why you will want to work with CS Insured to find a life insurance company that will grow and provide for you. This growth is referred to as the rate of accumulation – also known as the ROA. Whole life insurance policies offer various options for how any excess premium is invested. These differences are what will result in a different rate of return for that policy.

 

Many people assume that because the cash value is now liquid that it is available to help cashflow trips, pay for renovations or use as additional income. But this is not the case. Remember, this is part of your whole life insurance. It is not extra money to be used for a night on the town.

 

The problem with using this money is that it is actually part of your death benefit. This means that if you decide to borrow against it and die while the loan is outstanding, your death benefit (aka the money your family is counting on) is reduced by the amount of the still outstanding loan. For that reason it is vital that prior to borrowing against your cash value you ask yourself  before you borrow against your accumulated cash value you should ask yourself “If I died tomorrow, would my family need the money I am thinking about using for something more important than what I want to use it for today?”

 

What are the Requirements for Whole Life Insurance?

Like all kinds of insurance, whole life insurance does have a few requirements that applicants have to meet in order for the insurance to be valid.  Some whole life policy arrangements let the policy be “paid up,” which means that no further payments are ever required, in as few as five years, or with even a single substantial premium. Often if the payor does not make a sizable premium payment at the outset of the life insurance contract, then he or she is not allowed to begin making them later in the contract life. That said, some whole life contracts do offer applicants a rider which can be added to the life insurance policy, which allows for a one time, or occasional, sizeable additional premium payment to be made on the condition that a minimal additional life insurance payment is made on the regular schedule. One of the most significant differences between whole insurance and universal life insurance is that universal life insurance generally allows more flexibility in premium payment.

 

What are the Different Kinds of Pricing Available for Whole Life Insurance?


Non-participating Pricing


All values that are related to the whole life insurance policy (including death benefits, cash surrender values, premiums) are determined at policy issue, for the entire life of the contract. Generally, once these details are determined, they cannot be altered afterward. Not being able to change these details means that the insurance company takes on all risk of future performance versus the actuaries’ estimates. So, if future claims are underestimated, the insurance company has to make up the difference. That said, if the actuaries’ estimates on the future death claims are high, the insurance company keeps the difference.

 

Stock companies generally issue Non-participating policies. These are companies that have a stockholder capital bearing at least the majority of the risk. Since whole life policies usually cover a time span of more than 50 years, the higher premiums are often considered to be fair and accurate pricing given the timespan.  Actuaries are responsible for setting a rate that is sufficient enough to keep the company in black no matter what the market brings. The reality is that life insurance companies will be faced with future changes in things like life expectancy, changes in the political landscape and unforeseen economic conditions all of which have to be taken into account when determining the prices for whole life insurance policies.

 

Participating


In a participating policy, the insurance company shares the excess profits (divisible surplus) with the policyholder. This is paid out in the form of annual dividends. Generally, these “refunds” or payouts are not considered to be taxable income because they are considered an overcharge of premium. What tends to happen is that the higher the overcharge by the company, the more sizable that the refund/dividend ratio is. That said, there are other factors that will also have a bearing on the size of the dividend.

 

Participating policies are usually- although not exclusively issued by mutual life insurance companies. Stock companies sometimes release participating policies; however, this is a much rarer occurrence. One crucial difference between mutual fund participating policies and stock companies is that premiums for a participating policy are going to be higher than for a comparable non-participating policy. The difference (otherwise known as “overcharge”) is considered as “paid-in surplus” to provide a margin of error that is equivalent to stockholder capital. It should be emphasized to potential whole life insurance applicants that illustrations of future dividends can never be guaranteed.

 

In the case of mutual fund life insurance companies, the unneeded surplus is distributed retrospectively to the policyholders and is done so in the form of dividends.

 

Indeterminate premium


Indeterminate is similar to non-participating whole life insurance policy pricing, except that the actual amount of the premium may vary on a yearly basis. However, the premium will never exceed what the policy lists as the maximum premium. This allows companies to set competitive rates that are based on the current economic conditions.

 

Whole life insurance is a wonderful option for those looking to ensure that their family is covered and well taken care of when their time comes. There are a wide variety of options and payment plans that vary by company and state. If whole life insurance is something that you are thinking about getting contact CS Insured today to find out more.