The Whole Truth and nothing but.
Whole Life Insurance would seem to be self-explanatory, yet there still seems to be confusion – so much so that authors will spend their precious time writing entire books explaining it. The confusion may stem from the fact that so many of the details of the policy are kept secret. But fear not! I’m here to help.
Whole life insurance is so called because it provides permanent protection for the whole of life – from the date of issue to the date of the insured’s death (provided you open your wallet and dish out money consistently to pay the premiums.)
Despite Billy Joel’s declaration that only the good die young, we buy life insurance because we all may die too soon. Unlike Term Insurance (which provides only death protection), Whole life insurance builds an estate through the accumulation of cash value. In Texas, an insured would be “actuarially dead” at age 121 if still living (slim chance, huh?) and the policy would mature or endow. In laymen’s terms, this means that the cash value accumulation will equal the face amount, and that face amount would be paid to the insured. The benefit payable remains constant throughout the policy’s life and the premiums are set at the time of policy issue and also remain level for the policy’s life.
In addition to its permanence, there are a couple of other features of whole life insurance that make it different from term insurance: cash values and maturity at age 100. Both of these characteristics unite to produce living benefits to the policyowner. As mentioned in a previous post, the loan values and retirement income from the cash value in whole life are living benefits of life insurance.
While it is an important part of funding the policy, more often than not the cash value is often seen as a savings element since it represents the amount of money the policyowner will receive if the policy is ever cancelled. It’s often called the cash surrender value and typically variable products have hefty surrender charges, which discourage insureds from dropping them. This value stems from the way premiums are calculated and interest is paid, in addition to the policy reserves that build under this system.
The amount of a policy’s cash value depends on several factors including:
1.) The face amount of the policy
2.) The duration and amount of the premium payments
3.) How long the policy has been in force
A couple of features typically hold true:
1.) The larger the face amount of the policy, the larger the cash values
2.) The shorter the premium-payment period, the quicker the cash values grow
3.) The longer the policy has been in force, the greater the build-up in cash values
A policy matures or endows when the face amount equals the cash value. I’ll help clarify the concept of whole life policy’s maturity in the next post. But until then, remember what Billy Joel said, “Sooner or later it comes down to fate.”