Whole Life Insurance Whole life policies were the primary type of insurance sold before universal life insurance policies were developed in the late 1970’s. The distinguishing features of whole life are that it has guaranteed premiums for the life of the policy, a guaranteed death benefit and guaranteed cash value.
In most policies the death benefit remains level throughout the life of the policy, although some polices may offer the option to pay a higher premium to limit the premium-paying period (e.g., to age 65). The guaranteed cash value is expected to “endow” at a certain age, usually 95 or 100. This generally means that if the insured is still living at this point, the policy terminates and the cash value is paid to the policyowner. Most whole life policies are designed so that the guaranteed cash value at the time the policy terminates is equal to the death benefit.
Whole life policies are of two basic types, nonparticipating and participating. Participating policies pay dividends back to the policyowners. The dividends are a return of part of the premiums that the policyowner previously paid but which were not needed by the insurance company to pay expenses or meet claim obligations. The dividends can be taken in cash, used to reduce future premium payments or used to purchase additional insurance, known as paid-up additions. Paid-up additions increase the total amount of death benefit and also have cash value. But no premium payments are required to keep them in force. In later years, the policyowner may choose to surrender the additional coverage and use their cash value to pay premiums on the original policy. Nonparticipating policies do not pay dividends to the policyowners. However, most nonparticipating policies sold today credit cash value with an interest that exceeds the guaranteed interest rate. The non-guaranteed interest rate fluctuates with the investment results of the insurance company’s general investment portfolio. But it is guaranteed never to drop below a certain level. The grace period for paying premiums on a whole life policy is usually 31 days from the due date. If the required premium is not paid by the due date, or within the allowable grace period, the policyowner is permitted to borrow from any policy cash value to make the premium payments. If the policy is a participating policy, dividends or the surrender of the paid-up additions may be available to help pay the premiums. In addition, whole life policies have certain other non-forfeiture options. Policyowners can surrender the policy for any cash value. They can also use the cash value to continue the death benefit as term insurance for a limited period of time or purchase a completely paid-up policy with a reduced death benefit.