Unit
- Whole life insurance: A permanent life insurance contract providing coverage for the insured's entire lifetime, subject to premium payments. It combines a death benefit with a savings component that accumulates cash value on a tax-deferred basis.
- Guaranteed death benefit: The policy guarantees payment of a specified sum to beneficiaries upon the insured's death, provided premiums are paid. This benefit never decreases unless loans or withdrawals are taken, and it can increase through dividends.
- Cash value growth: A portion of each premium is allocated to a cash value account that grows at a guaranteed minimum interest rate set by the insurer. The growth is tax-deferred, meaning no income tax is due on gains while the policy remains in force.
- Level premiums: The premium amount remains constant throughout the premium-paying period, typically for life or a set number of years. This predictability helps with long-term financial planning, unlike term insurance where premiums increase at renewal.
- Policy loans: Policyowners can borrow against the cash value at a specified loan interest rate. The loan is not taxable unless the policy lapses, and the death benefit is reduced by the outstanding loan balance.
- Dividends (participating policies): Some whole life policies are participating, meaning they may pay dividends based on the insurer's actual mortality, expense, and investment experience. Dividends are not guaranteed but can be used to purchase additional coverage or reduce premiums.
- Nonforfeiture options: If a policyowner stops paying premiums, the policy's cash value can be used to provide a reduced paid-up policy or extended term insurance, preventing total loss of coverage.
- Tax advantages: The death benefit is generally received by beneficiaries income-tax-free. Cash value growth is tax-deferred, and policy loans are not considered taxable income under current law.
- General account backing: Whole life policies are supported by the insurer's general account, which invests primarily in high grade bonds and mortgages. This conservative strategy provides stability for the guaranteed cash value growth and death benefit, even during periods of market volatility or economic downturns.
- Paid up additions: Policyowners can use dividends or additional premiums to buy paid up additions, which are smaller whole life policies that increase both the death benefit and cash value. These additions are fully paid and accumulate their own guaranteed cash values over time.
- Cash surrender value: If the policyowner cancels the policy, the cash surrender value is the amount available after subtracting any surrender charges or fees. These charges typically decrease over a set period and eventually disappear, allowing full access to the accumulated cash value.
- Estate planning applications: Whole life insurance is commonly used to provide liquidity for estate taxes, equalize inheritances among heirs, or fund buy sell agreements. Placing the policy in an irrevocable life insurance trust can help keep the death benefit out of the insured's taxable estate.
Typical Premium to Death Benefit Ratio
1:20 to 1:50
Varies by age and health
Quick Revision
- Whole life insurance provides lifelong coverage with a guaranteed death benefit and cash value.
- Level premiums remain constant, offering financial predictability.
- Cash value grows tax-deferred and can be accessed via policy loans or withdrawals.
- Participating policies may pay dividends, but they are not guaranteed.