Whole life insurance is a long term life assurance and savings product. Whole life provides entire life cover that will financially protect the insured’s dependants upon death. A whole life policy will stay in force until death of the insured. A whole life policy can end early either by cancellation (surrender) or the non-payment of premiums.
With a whole life policy, premiums paid will typically remain constant and increase the cash value of the policy. The insurer’s mortality charge and admin fees are taken directly from the cash value of the whole life policy. The remainder is then invested by the insurance company into stocks, shares and/or bonds. The return on the investment goes back into the cash value. An excellent benefit of a whole life policy is that the cash value is subject to the deferment of tax. That is the policy holder will not need to pay tax until the money is withdrawn. The insured can access the cash value in the form of a loan.
Providing that premiums on a whole life policy have been met in full the death benefit is guaranteed and can be paid in two ways. One option is a lump sum payable on death the other is an additional payout in the case of early diagnosis of major illness. These payouts can either be paid in one fixed sum; or can be based on the performance of the investment part of the whole life policy.
A variety of products come under the umbrella of whole life insurance:
- Non-Participating Whole Life – Premiums and the face amount remain fixed. There are no dividends.
- Participating Whole Life – This policy will pay dividends, they are performance related and so are not guaranteed.
- Indeterminate Premium Whole Life – Premiums are adjustable to allow for performance factors; and changes in the mortality charge and admin fee.
- Single Premium and Limited Pay Whole life- The premium is either paid in one single lump sum; or it is condensed into a shorter payment period.
To gain benefit from a whole life policy it is essential that premiums are paid in full. This will be for the duration of the whole life policy (except in the case of a single premium and limited pay). If premiums are not paid the whole life policy will expire. Furthermore, the consumer must realise that whole life insurance is intended to be a long term product. Typically, at least twelve years will pass before the cash value begins to accumulate worth. The rate of return on the investment part of the whole life policy is rarely competitive with other investment alternatives. However, whole life has an added benefit. It provides protection, which is more important that the rate of return. For this reason whole life insurance is considered a good investment.
Each individual insured with a whole life policy will receive a tailored premium. Some people will be deemed uninsurable. When assessing risk insurance companies initially divide people into two groups; smokers and non-smokers. Other factors such as health and lifestyle, family history and occupation will also affect the whole life premium.
The benefits of a whole life policy are summarised below:
- Premiums paid increase the cash value. It may be possible to pay off the entire whole life policy early with this cash value.
- It may earn interest or dividends.
- Fixed and constant premiums can be opted for.
- The future protection of your family is guaranteed.
- No need to renew the policy; no more medical assessments.
- Savings feature, that can act as a lender.
- Tax incentives. In particular, an insurance trust may be set up that may pay taxes on your estate from the returns on the whole life policy.
The main disadvantage of a whole life policy is the expense. Also the rate of return is not guaranteed and for this reason a whole life policy should not be used as a sole retirement fund. A whole life policy is primarily a life assurance product; the cash value is simply an added bonus. A whole life policy is not suitable for short term use. It is important to make a financial plan. Providing you can commit to the whole life premiums for a minimum of twenty years and ideally more; and you will not need to access the cash value to fund living expenses; then a whole life policy could be for you. It is always wise to consult an experienced finance professional when considering whole life cover.
