Whole life insurance, also known as “straight life”, is the simplest type of permanent policy.
Whole life policies last for the insured’s lifetime or until the maturity date so long as premiums are paid.
The maturity date of a permanent policy is when the cash value (we’ll get into that below) equals the death benefit. The maturity date is set when the policy is issued. Policies issued prior to 2009 can have a maturity date as early as insured’s age 90. Policies issued after 2009 are usually set to mature at insured’s age 100 or 121. How maturity is handled will differ between insurance companies. Some companies will force surrender of the policy at maturity and pay out the cash value. In other cases, the maturity date may be extended and the cash value will not pay out until the death of the insured.
A portion of each premium payment on a whole life policy goes towards the cash value. The cash value can accumulate interest on a tax-deferred basis at a guaranteed rate set by the insurance company. The cash value is not paid out in the event of the insured’s death. However, there are many benefits to the cash value portion of these policies.
Cash values can be withdrawn on most whole life policies as partial surrenders or withdrawals. This is one of the only ways the cash value of a policy can be accessed. If the policy is built and utilized properly, these withdrawals can be done on a tax-free basis. Some policies allow unlimited withdrawals while others may limit the frequency or dollar amount.
Most insurance companies also allow for loans to be taken against the cash value. Similar to any other loan, loans against the cash value on a whole life policy come with an interest rate. It is important to note that the outstanding loan amount will reduce the death benefit in the event the insured dies before the loan is fully repaid. For example, say the death benefit of your whole life policy is $100,000 with a cash value of $50,000. If you take the full cash value as a loan and the insured passes away before you start to repay it, the beneficiary of the policy will only receive $50,000 (the death benefit less outstanding loan).
Premiums on whole life policies are level.
Some whole life policies can be considered limited pay. This means that premiums are only paid for a pre-determined number of years. Even after premiums are stopped, the policy continues to remain in-force until death of the insured or maturity. Premiums will be level during the premium-paying period.
Dividends and Paid-Up Policies
Participating Policies. Participating policies are policies that pay dividends. Dividends are a portion of the insurance company’s profit that is paid to its policyholders. They are not guaranteed. Dividends can be utilized in many ways such as:
– Cash. Dividends can be paid directly to the policyholder.
– Re-investment. Dividends can be left in the policy to accrue interest.
– Reduce Premiums. Dividends can be utilized to help cover the premium on a policy. In some cases, the dividends can completely pay for the premium.
– Paid-up Additions. Dividends can be used to purchase additional paid-up insurance. Those paid-up additions will add to the overall death benefit, accrue interest, and sometimes continue to pay dividends.
Paid-up Policies. While paid-up additions add to a policy, some whole life policies can be entirely converted to a paid-up policy. A paid-up policy remains in-force without requiring additional premiums to be paid. A whole life policy can be converted to a paid-up policy usually once it has accumulated significant cash value less than the death benefit. Because the policy would mature once the cash value matches the death benefit, a paid-up policy will reduce the original death benefit based on what that cash value would pay for.