Whole life insurance a key element of one’s financial plan
Whole life insurance, sometimes called permanent insurance or ordinary life, is designed to stay in force throughout one’s lifetime. As long as the policy owner meets his or her obligations under the policy, it remains in force, regardless of any changes in health that may occur.
Premiums for most whole life policies remain level. A portion of each premium payment is set aside to earn interest, and over time, a whole life policy will develop cash values. The accumulated cash values form a reserve that enables the insurer to pay a policy’s full death benefit, while keeping premiums level.
During life, many whole life policies have provisions to borrow a portion of the accumulated cash value. If a policy is terminated without the insured dying, there are various surrender options for the cash value available to a policy owner.
There are two primary types of whole life insurance, based on the period over which premium payments are made.
An ordinary life policy assumes that premiums will be paid until the insured dies. Premiums are based on the assumption that the insured will die at a certain age, typically age 110. If any insured lives to this age, the policy pays the face amount of the death benefit.
A limited-payment life policy assumes that all premium payments are made over a specified, limited period, typically ranging from one to 30 years. Premiums are generally higher than for an ordinary life policy, because the payment period is shorter.
Whole life policies often have additional, useful features.
Policy loans: Almost all whole policies permit the policy owner to borrow a portion of the accumulated cash value, with the insurance company charging interest on the loan. A policy loan will reduce the death benefit payable if the insured dies before the loan and any interest due is repaid. A policy loan also will reduce the cash surrender value if a policy is terminated. If a policy lapses or is surrendered with a loan outstanding, the loan will be treated as taxable income for the current year, to the extent of gain in the policy.
Policy dividends: Whole life contracts classified as “participating” offer the possibility of policy “dividends.” These dividends are not guaranteed, and represent a return to the policy owner of part of the premium paid. A dividend may be taken as cash or a policy may offer a number of other ways the dividend might be used.
It could be used to: reduce current premium payments; buy additional, completely paid-up insurance (known as paid-up additions); be retained by the insurer, earning interest for the policyholder; purchase one-year term insurance; be added to the policy’s cash value; or “pay up” the policy earlier than originally scheduled.
A number of optional provisions, commonly referred to as riders, can be added to a basic whole life policy, generally through payment of an additional premium.
Waiver of premium: This waives the payment of policy premiums if the insured becomes disabled and unable to work.
Accidental death: This pays the beneficiaries double (in some situations triple) the face amount of the policy if the insured dies in an accident.
Spousal or family term insurance: It allows a policy owner to purchase term insurance on a spouse or children.
Accelerated death benefits: This provision allows for payment of part of a policy’s death benefit while an insured is still alive. Such benefits are typically payable when the insured develops a medical condition expected to lead to death within a short period.
Whole life insurance is a necessary part of everyone’s financial plan. When meeting with your life insurance agent, have them explain all the provisions and benefits of your policy.
Bob Hollick is a State Farm Insurance agent based in Washington. His column appears every other Thursday in the Observer-Reporter.
To submit columns on financial planning, investing or business-related matters, email Rick Shrum at rshrum@observer-reporter.com.