Whole Life Insurance
Whole Life Insurance: Pays a benefit on the death of the insured while accumulating a cash value.
Whole life insurance is a type of permanent life insurance, in that it is not based on any specific amount of time, because as long as the policy is kept current (premiums are paid) the payout is guaranteed at the end of the policy. The major debate stems from the major differences between term life insurance, which is based on life insurance for a determined period of time, and whole life insurance.
The differences between term and whole life insurance are as follows:
- Term life insurance is life coverage only. On the death of the insured it pays the face amount of the policy to the named beneficiary. You can buy term for periods of one year to 30 years.
- Whole life insurance combines a term policy with an investment component. The investment could be in bonds and money-market instruments or stocks. The policy builds cash value that you can borrow against. Source
History of Whole Life Insurance
All life insurance was originally term insurance. However, because term life insurance only pays a claim upon death within the stated term, a number of term insurance policy holders became upset over the idea that they could be paying premiums for 20 or 30 years and then wind up with nothing to show for it.
In response to market pressures, actuaries conceived of an insurance policy with level premium payments that were higher than traditional term insurance contracts. These contracts would offer a “cash value”, which was designed to be a cash reserve that would build up against the known claim – the death benefit. These policies would also credit interest to the cash value account and upon maturity of the contract (usually at age 95 or 100), the cash value would equal the death benefit.
This produced a benefit to both the policy owner and the insurance company. By guaranteeing the death benefit, the policy owner was assured that insurance coverage would be in force when the insured died. The insurance company benefited because with every premium payment made, 30% is overcharge and pure profit, and thus the cost of insurance is able to increase, while premiums remain the same. Source
There are many factors to consider when choosing the right kind of life insurance. Here are a few more resources that will compare each policy as well as explain advantages and disadvantages of each.
- Learn about the benefits of whole life over term insurance.
- View our life insurance comparison chart.
- See the advantages and disadvantages of permanent life insurance.