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What is Whole Life Insurance?

Whole life insurance gives you lifetime coverage at a premium rate that does not increase with your age after you buy. In the early years of the policy when you're a low risk, you'll pay more in annual premiums than it costs to insure you.

As you become a higher risk at an older age, the level premium eventually becomes less than the amount it takes to insure you. Level premium payments build a reserve in your policy that is used to insure you as you age. Insurance companies call this reserve the "cash value."

Types of Whole Life Insurance

Joint whole life insurance
Provides basic whole life insurance benefits and features, but two lives are insured under the same policy. When one person dies, the benefit is paid to the survivor, who then has an option to purchase an individual whole life policy without having to prove insurability.
Last survivor whole life
A type of joint whole life insurancethat is designed mainly for married couples. Federal estate taxes are not collected on property left to a spouse. But when the surviving spouse dies, estate taxes are due and can be very high. A last survivor policy pays a benefit only after both spouses have died, providing funds for estate taxes. [more about last survivor insurance]
Universal
Lets you choose your insurance policy's face amount and premium, and change these factors while the policy is in effect. Your choices must fall within the company's specified minimum and maximum amounts. These guidelines are set to meet life insurance regulations and maintain healthy relationships between premium, face amount, benefit, and cash value. [more about universal insurance]
Adjustable
Allows you to vary your coverage as your insurance needs change. You normally choose the face amount you need and the premium you want to pay, and the company calculates a plan that provides coverage for your request. The result could be any plan from a term policy with a short period to a limited-payment whole life policy. You can also choose the type of plan and face value you want, leaving it to the company to calculate the premium rate needed. [more about adjustable policies]
Indeterminate premium life
Specifies two premium rates -- a guaranteed maximum, and a lower rate you actually pay. The lower premium is level for a set period of time. Then the company establishes a new rate that may be higher or lower than the initial premium. But your premium can never be more than the guaranteed maximum.
Interest sensitive whole life insurance
Indeterminate premium life insurance taken a step further ... cash value can increase beyond the stated guarantee if economic conditions warrant. You decide whether you want favorable changes to result in lower premiums or higher cash value. Also called current assumption whole life.
Variable
Has benefits and features similar to traditional whole life insurance, but face amount and cash value depend on investment performance of a special fund. Reserves are placed in investment accounts that are separate from the company's general account. Values of these separate accounts rise or fall based on returns from the separate investments. Face amounts and cash values depend on how investments perform. Most policies guarantee the face amount will not fall below a set minimum. Minimum cash value is rarely guaranteed. [more about variable policies]
Variable universal
Combines rate and benefit flexibility of universal life with investment and risk factors of variable life. Like variable life, this product is considered a security. It can only be sold by agents who have passed the National Association of Securities Dealers (NASD) exam. [more about variable universal policies]

Ways to Whole Life Pay Premiums

There are many different ways to pay premiums for whole life insurance, including:

Continuous
Premiums are payable throughout the life of the person insured.
Limited Payment
Payments are limited to a specified number of years, or an age after which premiums are no longer due. The annual premium amount is larger for limited payment policies than for continuous premium policies, but these policies build cash value more quickly.
Single Premium
A type of limited payment policy that requires only one payment and yields instant cash value.
Modified
For an initial specified period of time premium payments are lower, then increase to a level amount for the rest of the life of the policy. The policy's face amount does not change, so you can buy a larger policy than you might be able to afford otherwise. But the cash value grows more slowly than with traditional whole life policies.
Graded
A type of modified premium policy that has three or more steps of payment amounts.

Participating Policies

Some whole life policies can return money to you in the form of dividends. These are called participating policies. If the company earns a surplus because of profitable operations, owners of participating policies could share in the surplus. Since earning such a surplus depends on many variables, dividends are never guaranteed.