Whole life insurance is the oldest and most basic form of permanent life insurance on the market. Whole life insurance is generally thought of as burial insurance, but mutual life insurance companies often sell a wide variety of whole life insurance. Before you purchase this type of insurance though, it's a good idea to understand what it means.
Whole life insurance began as a "term to age 100" life insurance product in response to market demands for an insurance policy that would remain in force for as long as the insured was still alive and that would provide some type of guarantee of benefits when the insured finally did pass away. These early whole life products stressed the guaranteed nature of the product as well as level premiums. As long as the premiums were paid, the contract remained in force.
The significance of whole life insurance is that the policy guarantees that, as long as premiums are paid, the policy will remain in force for the life of the insured. This can mean the difference between leaving behind many debts for a spouse or children to deal with or being able to pay off your financial responsibilities at death.
Whole life insurance inflates the premium over the pure cost of insurance in the early years of the policy. It levels out the premium and places excess premium into investments to hold down the future cost of insurance. Additionally, it builds cash value that reduces the net amount at risk to the insurance company, thereby reducing the total costs associated with providing insurance over time.
A common misconception about whole life insurance is that it is "expensive insurance." In reality, whole life insurance provides death benefit protection that is based off the same mortality tables that term life insurance uses. The additional perceived costs associated with whole life insurance are often in the inflated premiums that help to build cash value and allow the contract to remain in force for the life of the insured. Over time, less premium will be paid into a whole life contract when compared to an annual renewable term life insurance policy because the whole life insurance uses premium plus investment interest to hold down the cost of insurance and the annual renewable term does not.
Before buying whole life insurance, consider what the policy will be used for and whether you have a permanent need for life insurance. Since whole life insurance is initially more expensive in terms of premium costs than term life policies, you also need to be able to afford the initial upfront higher premiums.
- "Life & Health Insurance, License Exam Manual, 6th Edition"; Dearborn Financial; 2004
- "Practicing Financial Planning for Professionals, practitioner's 10th edition"; Sid Mittra, Anandi P. Sahu, Robert A Crane; 2007
- "Ernst & Young's Personal Financial Planning Guide, 5th edition"; Martin Nissenbaum, Barbara J. Raasch, Charles L. Ratner; 2004
- http://www.ins.state.ny.us: Whole Life Insurance
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