Whole Life Insurance Explained
written by Mike Ballew February 24, 2019

As the name implies, whole life insurance provides coverage for your whole life. It's also known as permanent life and straight life. Here’s how it works: you pay premiums for the rest of your life, and when you pass away your loved ones receive money. How’s that for a simple explanation?

The Details

A premium in the insurance world is a periodic payment made by you, the policyholder. Whole life insurance premiums are typically paid annually but for slightly more you can pay them on a monthly basis. The good news is, your whole life insurance premium will never go up; it typically remains the same throughout the life of the policy.

A whole life insurance policy has a face value and a cash value. The face value is the amount the policy beneficiaries (your loved ones) will receive upon your passing. The cash value is the amount you receive if the policy is terminated. Whole life differs from the more common term life in that with whole life you can access the accumulated cash value.

Cashing In

If the purpose of life insurance is to provide for your loved ones when you pass away, why would anyone terminate their policy and take the cash? How could anyone be so selfish?

It’s not a matter of being selfish. The ability to withdraw the cash value or borrow against it is one of the main reasons people choose whole life over term life. Most of us reach an age where we feel like we might not be around much longer. People cash out whole life insurance policies to enjoy life with their families while they’re still around. Or, the money can be used to pay bills if other sources of income have dried up.

Types of Whole Life Insurance

Non-participating whole life, also known as traditional, level-premium, and fixed-premium, does not share investment gains with the policyholder. The policyholder pays a fixed premium and beneficiaries receive the face value in the amount specified in the policy. Non-participating is the most common and straightforward type of whole life insurance.

Participating whole life shares investment earnings with the policyholder in the form of dividends. What you do with them is up to you. You can keep them or use them to pay premiums. Either way, the dividends are taxable income.

Indeterminate-premium whole life, also known as variable-premium and indexed life, exchanges guaranteed returns for the possibility of higher returns based on market conditions. Rather than paying a fixed premium, premiums are tied to investment earnings. In good years your premium may decrease and in bad years your premium may increase. The maximum premium for indeterminate-premium whole life insurance is typically specified in the policy.

Closing Time

Many people include whole life insurance in their retirement planning. Between Social Security, pensions, annuities, employer-sponsored retirement plans, individual retirement accounts, stocks, bonds, savings, and whole life insurance, spreading your assets around is a good way to minimize risk.

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Eggstack founder, Financial Planning Association member, engineer, and software developer.