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Whole Life

Whole life policies are a type of cash value life insurance that offer protection throughout a lifetime--that is, for a person's "whole life." You pay the scheduled premium from the day you buy the policy. As long as you pay the premium when due, the policy remains in force throughout your life or until you cash it in. The scheduled premium may be level or increase after a fixed time period.

  • Some companies offer special whole life policies designed for children or teenagers with modified or graded premium amounts. These policies have low premiums in the first few years, and then gradually increase for several years until premiums reach a fixed level like other whole life policies.
  • Limited premium payment periods are also offered by some companies. They require premiums for a specific number of years (such as 10, 20, or 30) or until you reach a certain age (such as 60 or 65). Since you pay fewer premiums, the premiums may seem higher than what you might pay for other kinds of policies. The advantage is that you accumulate cash values faster, and you are free from premiums in later years when your income will most likely be lower.

The premium on whole life insurance is determined when issued and will not change from the amounts shown in the policy schedule. It is important that you look at the policy schedule and understand what your premium payments will be and that you can afford them. An insurance company will base the premium on your age and insurability at the time of purchase. Initially, the premium for a whole life policy will be higher than that for a term policy. However, since premiums on whole life generally remain fixed, a whole life policy purchased at a younger age is usually a better buy as you grow older. Part of each premium payment goes to the cash value growth, part for the death benefit, and part for expenses such as commissions and administrative costs.

There are two types of traditional whole life policies:

  • Nonparticipating policies provide a schedule of guaranteed premiums and death benefits and a table of guaranteed values, but they pay no dividends.
  • Participating policies guarantee premiums, death benefits, and cash values, and also may pay policy dividends. Because of the dividend feature, premiums tend to be higher. However, the total return in dividends may offset the higher premiums as the policy ages.

Consumers have several options for using policy dividends, including letting the dividends accumulate with interest, taking the dividends in cash, using the dividends to pay toward the premium, buy permanent paid-up additions, or buy a combination of one-year term and additional permanent paid-up additions.

Some companies fail to pay dividends at the originally projected rate, while others exceed their original projections. When making your purchase decision, remember that dividends are not guaranteed and may differ from those shown in illustrations. Ask for a company's history of projected dividends versus paid dividends.