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  • What is whole life insurance?
  • July 8, 2013
  • Tony Steuer

    By Tony Steuer, CLU, LA

    Whole life – often called ordinary life or straight life – is the original permanent life insurance coverage and is still the most commonly used in-force life insurance policy today.

    The concept is simple.

    Premium payments are made for life at a rate fixed by the company and agreed to by the applicant. When the insured dies, the company pays the face amount to the named beneficiary. It’s that simple.

    The company can never raise the premium rate, nor can it cancel the policy as long as the premium is paid on a timely basis.

    The insurance company promises to pay the face amount upon death, whether that occurs the day after the coverage becomes effective or at age 99.

    To keep this promise, the company employs actuaries who determine the premium payment level that will be adequate to fund the guarantee in the policy. Life insurance company actuarial science is, as the term implies, very scientific and fairly precise.

    Does whole life insurance fit your insurance needs?

    It involves the pooling of risks over a large population of insured persons. The company has no idea which specific insured person will die in any given year, but it knows with considerable accuracy how many will die each year, and their likely age distributions.

    This knowledge allows actuaries to calculate premiums and set adequate reserve levels necessary to keep the promises made by the company.

    Although this is not usually specified in the policy, if the insured person lives to the end of specified mortality table, the company usually considers the policy “endowed” and pays the full-face amount to the policyholder.

    Whole life has become much less popular over the past 20 years, with the introduction of universal life, variable life, and variable universal life.

    Whole life policies are more rigid than adjustable life, universal life, and variable universal life in the sense that premiums must be paid on time or else the policy “lapses” (i.e., ceases or goes into a so-called non-forfeiture option mode, such as extended term coverage or reduced paid-up life insurance).

    These policies usually include the “automatic premium loan” feature, which allows the company to pay any overdue premium payments by making a loan from a cash value.

    The distinguishing feature of the whole life policy is it simplicity. Pay the premium on time and the policy will pay off upon the insured’s death– period. If the policy owner becomes unable to pay the premium on time, the policy will lapse. This could be the result of job loss, illness and/or other circumstances.

    The main disadvantage of whole life is the premium payment, which is higher than for universal life, variable life, variable universal life, and their variant.

    Policy loans are usually available, but borrowing from a policy could lead to its eventual lapse if the loan is not repaid.

    Through its general portfolio, the insurance company invests the cash value in a whole life policy. In contrast, variable life policies have the cash value component invested in separate accounts.

    Whole life policies are either participating (par) or non-participating (non-par).

    A participating policy charges a higher premium and in return pays regular dividends to the policy owner. Non-par policies pay no dividends and premiums are usually lower than par policies.

    Dividends can be utilized in several different ways. Dividends are not guaranteed and depend on the company’s actual experience with the book of in-force business.

    Dividend options include:

    – Cash

    – Purchase of fully paid-up life insurance in small increments with each dividend

    – Reduction of the next premium payment

    – Retention by the company at interest

    – Purchase of one-year term insurance in an amount equal to the then cash value, which is a popular option among policy owners who want to maximize the face amount of coverage during the early in-force years.

    It is important to understand that dividends are bought and paid for when you apply for a participating policy. The trade-off for dividends is higher premiums.

About Tony Steuer

Noted insurance author Tony Steuer has spent over 25 years in the life insurance industry. Steuer’s leadership roles include serving on the California Department of Insurance Curriculum board and the National Financial Educator's Council Curriculum Advisory Panel as well as having served as President of the San Francisco Chapter of the American Society of CLU & ChFC, President of the leading Life Insurance Producers of Northern California, and as a board member of the San Francisco Life Underwriters Association. Mr. Steuer is the author of Questions and Answers on Life Insurance: The Life Insurance Toolbook, The Questions and Answers on Life Insurance Workbook and The Questions and Answers on Disability Insurance Workbook - the first two were awarded the “Excellence in Financial Literacy (EIFLE) Award from the Institute of Financial Literacy. Steuer holds a Chartered Life Underwriter (CLU) designation and also holds the Life and Disability Insurance Analyst License, a designation that is held by less than thirty people in California.

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Questions & Answers on Life Insurance by Tony Steuer, CLU, LA, CPFFE is licensed under a Creative Commons Attribution 3.0 Unported License.

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