Basics of Whole Life Insurance

Whole life insurance is a "permanent" policy that is intended to be kept and maintained for a lifetime

A whole life insurance policy is guaranteed to provide funds for your family in the event of death. Plus, it will gain "cash value" as premiums are paid over many years. Whole life is handled more conservatively than universal and variable universal policies, as the insurer must guarantee a certain payout.

There are several forms of whole life structures:
-Straight - meaning the standard premiums are fixed for the life of the policy.
-Limited pay - premiums can be set to be paid with a specific time limit, thus ensuring the policy is paid for by a certain age that is less than the usual 100 years.
-Single premium - one large premium is made to pay off the policy. This means instant access to borrowing against the cash value.
-Graded - premiums begin lower than gradually rise until a certain age.
-Modified - premiums start lower then rise throughout the life of the policy holder.

In addition, you will choose a policy that is "participating" or "non-participating." The former will at best return annual dividends, but usually demands a higher premium. The latter will cost less, but offers no dividends or special features.

Advantages of whole life:
-The payout at death will not be subject to income tax.
-Loans against cash value are not subject to income tax (but interest will apply and if the loan is not repaid, the remaining amount will be deducted from the death benefit).
-Premiums will remain the same through the life of the policy.
-If you have little knowledge or interest in outside investing, then a conservatively managed whole life policy may be right for you. Otherwise, you may see larger dividends making those investments on your own.

Disadvantages of whole life:
-It takes many years to build up a cash value.
-Cash value policies are more susceptible to high-pressure and unethical sales tactics as commissions are typically higher.
-This type of policy should never be considered the equivalent of a savings account or retirement savings.
-Death benefits must be determined at the outset, which may be difficult to judge - or even unaffordable - at a younger age. Difficult situations arise in two ways: underinsuring or over-extending. A low payout may not be worth the years of premiums; on the other hand, higher premiums could well be beyond the scope of your current financial situation - a cancelled policy means a loss of everything.

How can premiums remain the same, even as you age? When the policy is purchased, premiums may seem high be comparison to other life insurance options. In the early years, you are, in effect, paying more than you normally would for a person your age. However, as you get older, the premiums - while remaining the same - will be actually lower than comparison policies for a mature person. It averages out, in other words.

Researching this type of policy can be tricky. While you can certainly obtain on-line or over-the-phone quotes, it may be best to consult with a tax adviser to gain greater understanding of both advantages and pitfalls as well as the ins and outs of state-by-state requirements. If possible, work only with a Chartered Life Underwriter (CLU), who will be highly trained and must abide by a code of ethics.