Whole life insurance policies are loosely divided into "participating" and "non-participating" policies. With a participating policy, the insurance company distributes its profits to policyholders as dividends through the insurance policy. These dividends may be reinvested in the policy to increase the death benefit coverage you have. In a sense, the insurer pays for the additional coverage. A non-participating policy is a policy that does not earn profits from the insurance company. There are several different variations of non-participating whole life policies.
Straight Whole Life
A whole life insurance policy that is set up to accept premium payments for your entire life, up to age 100, is a straight whole life policy. Your death benefit is issued by the company and the policy builds a cash reserve called a cash value. The cash value grows every year at a contractually guaranteed rate, and no more, until it equals the death benefit at age 100. The death benefit does not increase over time, as the company is not sharing profits with you as a policyholder.
Limited-Pay Whole Life
Limited-pay whole life limits the premium-paying period to a set number of years. The premium-paying period may be for 20 or 10 years or some other time period. When the premium-paying period is over, no further premiums can be paid on the policy. The policy is "paid in full." The cash value is contractually guaranteed to equal the death benefit at age 100. Like straight whole life, the death benefit never increases beyond the amount you originally purchase and the cash value growth rate never changes for the life of the policy.
Interest-Sensitive Whole Life
Interest-sensitive whole life gives you the opportunity to accelerate the cash value growth over the guaranteed growth rate. Interest-sensitive whole life cash value grows at the guaranteed rate, the same as other whole life products. However, current market interest rates increase the growth rate of the cash value account. If current market interest rates fall below the guaranteed rate, then the guaranteed rate is what is credited to the cash value account. Like other non-participating policies, the death benefit does not change for the life of the policy. However, unlike other non-participating policies, the cash value may increase beyond the guaranteed rate.
Indexed Whole Life
Indexed whole life refers to inflation indexing. This type of whole life adjusts for inflation every year, providing a measure of protection from the effects of inflation. The guaranteed rate is paid to the policy, plus an inflation factor. The contract's cash value still equals the death benefit at age 100, but the death benefit will not change over your lifetime.