Whole Life Insurance

Whole life insurance is a type of permanent life insurance that offers coverage throughout the lifetime of the insured. For policyholders who are diligent about paying premiums, whole life will provide coverage until the day the policyholder passes, without the need for policy conversion, extension, or renewal.

Among the various types of permanent life insurance policies, whole life insurance is the most common. The American Council of Life Insurers (ACLI) reported out of all policies sold to individuals in the US in 2017(1), 60 percent were whole life policies.

Why is whole life insurance more popular? Clear knowledge and understanding of this type of insurance coverage and its benefits and limitations should provide a fair perspective for consumers researching what type of life insurance to buy.

What is Whole Life Insurance

To understand whole life insurance, one should first understand the key elements of this type of coverage.

Permanent Coverage

In the case of a term life insurance policy, the coverage term is fixed (e.g. 30 years). This means the policyholder may outlive the policy duration. Once the policy expires, the insurance company is no longer responsible for paying out any death benefits to the beneficiary. This concern is avoided, though, in whole life insurance, which remains active until the last day of the insured’s life, provided there was no default on premium payments. This increases the chances of beneficiaries receiving the final payout.

Fixed Premiums

Most permanent life insurance policy premiums are fixed amounts. This means the rate the policy begins with will be the same rate throughout the policy—it is not subject to change. The advantages of fixed premiums are:

• The premium amount is never uncertain or unknown. Therefore, there are no surprises or worrieds of affordability of increasing rates in the future.
• Budgeting for future premium payments and personal financial planning becomes easier.

Cash Value

In most whole life policies, a portion of the premium paid accrues into a cash value account.

• This amount grows with time.
• The policyholder can withdraw or take a loan against this accumulated savings account.

This additional saving feature of the whole life insurance distinguishes it from term life insurance.

Who Should Buy Whole Life Insurance?

Whole life insurance suits almost any individual who wants to have lifelong insurance coverage, in other words, virtually everyone. However, under certain circumstances, individuals may not need full life protection. Sometimes people take life insurance for short-term coverage for various reasons. Some instances explaining this notion follow.

• Consider someone needing life insurance coverage for student loans or a mortgage. Both these loans have fixed terms and a term insurance policy could be a cheaper and more useful option in this case.
• Many adults want coverage for their final expenses. Both term and whole life coverage can be used for this.
• In some cases, due to diverse needs, people choose a combination of both term and whole life insurance.

The main determining factor in selecting life insurance coverage is asking, “How much life insurance do I actually require?”

Whole life policy premiums are roughly 10 times that of term life insurance policies for corresponding periods. Whole life insurance could prove to be a less cost-effective option for some people (particularly for older applicants).

For a whole life insurance policy, the insured needs to have a steady source of income to pay the premiums comfortably. If for some reason, future income or expenses are uncertain, term life or a universal insurance policy might prove a better option.

Advantages of Whole Life Insurance

The whole life insurance policy is not for a fixed duration like the term life plan. It provides coverage for the whole life of the insured. But whole life policies are not necessarily limited to the death benefit alone.

Before selecting a life insurance plan, those shopping around for coverage should consider all the options available. A brief compilation of the potential financial gains a whole life insurance policy can provide is detailed below.

1. Guaranteed Protection of Value and Growth

The accumulated cash value of a whole life policy is unaffected by stock market upheavals. In most cases, the accumulation is through periodic premium accrual independent of stock market movements. Furthermore, this policy’s cash value grows at a fixed rate, independent of stock market climbs and reversals.

2. Additional income

Whole life coverage is exchangeable for an annuity that will pay out a steady income for life. This exchange will not draw any taxation. Policyholders considering this should consult a registered financial consultant or a tax expert for advice before taking action.

A professional licensed life insurance broker is better suited to assess what your unique needs are.

3. Potential Source of Funds

During the lifetime of the insured, if he or she has individual needs requiring additional funds to meet important expenses, whole life insurance’s accumulated cash value can be very useful. Policyholders can take a loan from this amount and repay later, but anyone borrowing against their benefit amount should remember:

• Interest will accumulate on the payout due to the loan.
• Any unpaid loan amount is adjusted against the death benefit and the beneficiary will only receive the difference remaining in the cash value of the policy.
• Loan amounts are tax exempt.

4. Annual dividends

Some insurance companies will share a part of their annual profits with their policyholders, in the form of annual dividends paid for the life of the whole life insurance policy. The dividend amounts are variable and depend upon the profits earned. Policyholders can use dividends to purchase additional coverage. Further benefits of this include the following:

• Increase the death benefit.
• Increase cash value

5. Surrendering for Cash Value

Many unforeseen adverse financial situations can befall a policyholder over the course of a lifetime. These may include:

• Retrenchment
• Losses in business or investment
• Chronic illness
• Cash crunch

In these situations, if the policyholder is in urgent need of money, he or she may surrender the whole life policy in return for the cash value accumulated until then. The insurer may deduct some charges before paying the accrued amount to the policyholder. Once surrendered, this policy ceases to exist.

• The policyholder does not need to pay further premiums after surrendering the policy.
• Beneficiaries named in the original policy cannot claim the death benefit.

6. Retirement savings vehicle

Whole life insurance can be used as a savings vehicle. It serves three purposes:

• Protects families from financial burdens in the event of the policyholder’s death
• Acts as a contingency financial relief option
• Interests and dividends grow tax-free, increasing the amount available for compounding.

Limitations of Whole Life Insurance

• Whole life insurance has a few complex dimensions. For instance, the insured can borrow money from the accumulated cash value only after being insured for a fixed duration. This precondition is mainly to ensure some funds accrue before a withdrawal.
• Your policy can lapse if the sum of your outstanding loan and its accumulated interest amount exceeds the cash value of your policy. So, be very careful when you take out any loan against the accumulated amount.
• When someone buys a whole life policy, they commit to making regular premium payments for their lifetime. If the insured does not meet this obligation, the premiums will be paid out of the cash value account. Prolonged default will cause the policy to lapse.
• The premium amount payable under the whole life insurance is higher than that of term life. Even though during the initial years, premiums are costlier, whole life insurance can be cost-effective, if obtained early in life.

The main objective of any life insurance policy is to protect the insured’s loved ones from financial distress after they are no longer there. Both term life and whole life accomplish this. Some people may prefer a combination of both. Before deciding which option to choose, make sure to understand:

• Benefits and limitations of both
• Key features of both
• How each will help the beneficiaries (the insured’s surviving family members in most cases)

Term Life Insurance vs. Whole Life Insurance

Key Features of Term Life Insurance

• Payout only in case of death.
• No benefit if policy term expires before the death of insured
• Easy to purchase.
• Affordable
• Policy valid for a fixed term (e.g. 5, 10, 15, or 30 years)
• Premium increases with age; especially higher for persons above 50
• Policy renewal must take place once the term ends
• Could serve as provisional protection to augment permanent life insurance coverage
• Convertible into whole life insurance

Key Features of Whole Life Insurance

• Lifetime coverage.
• Dual benefit of the death benefit in case of death as well as cash value accumulation.
• Medical exam nearly always required
• If purchased without a medical exam, cost increases
• Requires 12 to15 years for cash value to build
• A good estate planning instrument
• Cash value varies with the changes in the value of return on investment of its underlying asset
• The policyholder can withdraw or borrow against accumulated cash value while the policy is in force
• Premiums are higher than that of term life insurance, especially during the initial years; however, staying invested for decades can offset this cost

Which is better: Term Life or Whole Life?

When deciding whether to purchase term life or whole life coverage, there are many variables to consider. When shopping for coverage, consumers should consider multiple aspects of their lives and discuss their options with an insurance agent. The agent will walk them through the process. Before making a choice, consumers should consider the following factors:

• The current age of insured
• The present health of insured
• Family’s financial needs
• The estimated cost of a funeral and similar expenses
• Children’s age
• Expenses in case of serious long-term ailments
• Outstanding loans and mortgage amounts
• Retirement and post-retirement plans
• Family’s expected future financial needs (for example, children’s college education)
• Are additional savings needed for retirement?
• Setting up an estate and how taxation will impact such an estate
• Does the insured’s will include a trust?
• Will life insurance proceeds be donated?
• Opinion about perpetual term life premiums that offer no payback except in death

For example, for a 32-year old sole-wage-earner with a family and children in kindergarten, a term life insurance policy that provides the necessary coverage amount may suit him best.

In the event of your premature demise, what kind of financial safety net would your family need? To determine the answer to this question, consider the following expenses:

• Annual living costs of your family
• Mortgage payments
• Other outstanding debts
• Children’s long term education expenses

Many middle-aged policyholders who have children set the duration of their policy to match with the time their children might complete college. In such cases, term life insurance may be the right choice.

Alternatively, a whole life insurance policy with the same coverage amount is another option. With this insurance:

• The policy will take care of all financial worries of the family event the insured passed away, just as in the case of term life
• The accumulated cash value would be a key advantage
• The cash value can serve as a financial safety net for emergencies

Still, yet another option for the example of the 32-year-old above would be a conversion of term life into whole life coverage. This could allow for additional retirement savings.

Converting from Term Life to Whole Life

Most insurers of life insurance permit converting a term life insurance policy into any permanent life insurance, including whole life. But under what circumstances is this the right course of action? Some situations in which this conversion may be useful include:

• The policyholder is already in his or her 50s or 60s, and their term life policy is due to expire
• The insured wants to continue coverage but due to his or her age or other factors, the desired term length is not available.
• The policyholder plans to set up an estate, but the significant estate taxes are bothersome
• The insured’s will includes a trust
• The policyholder is looking for tax-free investment options

Converting term life to whole life can allow policyholders to:

• Gain extended coverage
• Build up cash value to use for future borrowing

Your needs and objectives will determine how you structure and manage your policy. You may seek advice from an experienced insurance agent in order to make a preeminent choice that best addresses your situation.

Buying both Term Life and Whole Life

Individuals can simultaneously own both kinds of life insurance. In most cases, persons who consider this option would already own a whole life policy. Any short-term need for additional coverage could trigger the demand for supplementary term life insurance. The duration of the term life coverage will match the duration of the additional risk.

In some instances, candidates for whole life insurance already own a term insurance policy and are interested in whole life insurance as an investment option for:

• Retirement savings
• Estate benefits

Cash Value and Death Benefit in Whole Life Insurance

When a claim is made, the beneficiary receives the death benefit while the insurance company gets the cash value.

• Whole life insurance guarantees a death benefit, irrespective of when the insured dies, because other than in extraordinary circumstances, the policy remains active for the duration of the policyholder’s life. But term life benefits are payable for a fixed duration only.
• Whole life has an additional benefit of accumulated cash the policyholder can withdraw or take a loan from.
• If a withdrawal is made, the death benefit will be reduced by that sum.
• This withdrawal is not taxable unless it exceeds the amount of premiums you’ve paid into the policy.
• Once a policy is “paid up”—the cash value has accumulated enough to allow loan, withdrawal, etc.—the policyholder can use it to pay the whole life insurance premiums on the same policy.

When you tap into the cash value, take care to ensure you do not deplete the death benefit by too much.

Important Riders to Consider

When shopping for a whole life insurance policy, knowledgeable consumers inquire about adding riders to their policies. Below is a rundown of popular riders often offered by insurance companies on these types of policies. Some companies offer some of these riders free of charge, while some riders come at a price. Understanding the insurer’s specific terms and conditions surrounding a rider is key in taking advantage of the benefits it offers.

Waiver of Premium Rider

If the policyholder is unable to work due to permanent disability or illness, the insurer may waive the premiums. This is applicable for instances such as:

• Amputation
• Paralysis (full or partial)
• Spinal injuries
• Loss of eyesight

The level of disability that triggers this rider varies across insurance companies. Having this rider, however, can ensure the policy does not lapse, and the beneficiary receives the death benefit in the event the insured passes away.

Critical Illness and Terminal Illness Riders

Another name for a rider that covers critical or terminal illness is “accelerated death benefit rider,” which gives the insured the option to receive a portion of the policy’s death benefit, upon being diagnosed with a terminal illness. In most cases, this rider may be free or very economical because its terms of applicability can be very stringent.

• The percentage of benefits paid in advance can be below 50 percent.
• The definition of terminal illness varies from one policy to another.
• Benefits paid are usually taken out of the face value of the policy once a claim is made.

A critical care rider is similar. The policyholder can utilize an early partial payout from the death benefit if he or she receives a diagnosis of an illness that requires prolonged intensive treatment.

For instance, if the insured suffers a stroke and requires constant nursing care, a premature partial payout of benefits is available to pay medical bills.

If the insurer offers this rider free of charge, it is in the best interest of the insured to take advantage of this benefit. If the insurer does not offer it for free, the policyholder can decide if it is in the best interest of the policy and, ultimately, the beneficiary, to opt-in after going through the terms and conditions of the rider in detail. Understanding the conditions under which this rider will apply will make the decision undoubtedly easier.

Tax Rules for Whole Life Insurance

• The death benefit is exempt from tax. Just as in the case of term life insurance payouts, the lump sum paid to beneficiaries upon the death of the policyholder is not a taxable asset.
• Using prudent measures, policyholders can avail tax-free loans issued out of their cash value. This loan can fund expenses such as college tuition or augment retirement income.

Conscientious policyholders should exercise extreme caution with these loans, however. Borrowing combined with poor management can create an income tax liability if the policy lapses or is surrendered. The taxable gain is calculated without considering the loan amount.

Top Companies Selling Whole Life Insurance

Guardian Life Insurance

• In certain types of whole life policies offered by Guardian Life Insurance, the rate of cash value accumulation is linked to the Standard & Poor’s 500 Index.
• On every 10th anniversary of an insured’s policy, he or she may attain the loan option at both fixed and floating rates.
• Guardian has a history of paying out dividends to policyholders.

MassMutual

• MassMutual guarantees their whole life policies against rejection on medical grounds. In other words, they do not require a medical test for 50- to 75-year-old applicants opting for coverage from $2,000 to $25,000.
• Medical exams are, however, mandatory for policies with higher coverage amounts.
• Policyholders may earn dividends from MassMutual.

Mutual of Omaha

• Mutual of Omaha features three offerings in whole life insurance with diverse features and payouts.
• This company does not require medical examinations.
• Based on the chosen policy type, Mutual of Omaha offers coverage amounts between $3,000 and $50,000.
• This provider offers whole life insurance for children as well.

New York Life

• New York Life whole life insurance policies include a standard policy variant and a customized policy for accelerated cash value accumulation.
• New York Life policyholders may earn dividends.

Northwestern Mutual

• Northwestern Mutual offers standard whole life insurance and CompLife (a combination of term and whole life insurance)
• Policyholders have the options of premium payment durations of until 65 years of age or until 90 years of age.
• Northwestern Mutual features policy periods of 10 to 30 years.
• Policyholders benefit from a dividend payout option.

Ohio National Life Insurance Company

• Ohio National Life Insurance Company offers four options for coverage with diverse premium payment terms.
• Policyholders get a dividend payment option.
• This company offers an exclusive option of $10,000 for final expenses for persons aged 50 to 80.

Transamerica

• Transamerica offers coverage amounts ranging from $2,000 to $50,000.
• This company offers three options for final expense policies.

Whole Life Insurance – Application Process

When applying for whole life insurance, applicants must provide basic details and personal information on the application such as the following:

• Name
• Contact details
• Employment details
• Height
• Weight
• Date of birth
• Personal habits (e.g. smoking, alcohol consumption, workouts, etc.)
• Financial details (yearly earnings and net worth)

Mindful applicants should resist any temptation to lie about height, weight, or health condition. Disclosing accurate facts is vital to getting approved. If at any point during the policy application or later, the insurer discovers the applicant misrepresented information, especially details pertaining to health, the company could:

• Raise policy premiums
• Cancel the policy
• Deny the beneficiary’s death benefit claim

Most insurance companies will mandate a medical examination by an authorized third party. A life insurance agent can make the necessary arrangements for applicants to meet a paramedic or nurse at a convenient place, whether home, office, or a medical center specified by the insurance company.

Key Takeaway

Everyone’s situation is different. The choice of insurance company, the type of whole life insurance policy, and the policy amount will vary for different people. What may be the best for one person may not necessarily be the best for another.

With the guidance of a proven and reliable life insurance agent and by carefully considering personal and family situations, the overall financial goals, and available options, consumers can make a smart and confident choice when buying whole life insurance.

References

1. 2018 Life Insurance Fact Book, Chapt 7 Page 68 – Available from: https://www.acli.com/posting/rp18-007