An Intro To Whole Life Insurance

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Welcome to an introductory overview on what allied health professionals should know about whole life insurance. 

Although this article will focus on whole life insurance, a type of permanent life insurance, this article is a must-read if you’re looking to purchase any type life insurance. 

That’s because the independent seller of insurance Best Life Rates estimates that 44% of life insurance policies owned in the United States in 2017 were permanent life insurance policies.

With this figure in mind, allied health professionals in the market for life insurance will surely be offered the opportunity to purchase whole life insurance, and therefore should be prepared with a better understanding of what a whole life insurance policy actually offers.

This article will give you an overview on what whole life insurance is so you can best decide if purchasing a whole life insurance policy is actually in your best interest. 

Let’s get started.

WHAT TYPE OF INSURANCE IS WHOLE LIFE INSURANCE?

While, in some circles, you may find the phrase “whole life insurance” used interchangeably with the phrase “permanent life insurance,” this is not completely accurate. 

Permanent life insurance is actually just one of the two major categories of life insurance – the other category is term life insurance. I suggest reading the linked article about term life insurance first, since term life insurance is more straightforward to understand. 

Permanent life insurance has three major types: Whole life insurance, universal life insurance and variable life insurance. 

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By reading Similarities Between Types of Permanent Life Insurance, you can first learn what each of these types of permanent life insurances have in common to then, next, make it easier to understand their differences. 

If you’ve read about the similarities already, then forge ahead to learn about the uniqueness of whole life insurance will be covered next.

WHAT ARE THE DEFINING CHARACTERSITICS OF WHOLE LIFE INSURANCE?

Premium:

The premium is the amount the policyholder pays to keep the life insurance policy in force. Depending on the type of whole life insurance policy you own, the premiums with a whole life insurance policy can vary in the amount due. 

A more detailed overview on each of these types will be covered later, but the most common type of whole life insurance you will likely encounter is level premium whole life insurance. As described by the insurance company Guardian, with level premium whole life insurance, the policyholder pays the same premium throughout the duration of owning the policy.

Having the premium remain the same is an important distinction from other types of permanent life insurance despite the gradually increasing cost to the insurance company for insuring you as you continue to age resulting in your health also likely declining. To make insuring you still financially beneficial for the life insurance company, the Insurance Information Institute explains how the premium payments you make start out higher at the beginning of the policy’s duration compared to the initial premium amount of the other major types of permanent life insurance policies.

Death Benefit:

The death benefit is the amount paid out to the life insurance policy’s beneficiaries upon the death of the insured. When you pass away, as long as you have paid the premiums to keep the whole life insurance policy in force, a death benefit will be paid out to your beneficiaries. 

In comparison to other types of permanent life insurance, the death benefit with whole life insurance is guaranteed to never decrease.      

Dividends:

When a company decides to share profits with its investors, the money provided is referred to as a dividend.

Dividends can be distributed to you if you own a whole life insurance policy from what is known as the “participating category” of whole life insurance – more on this category below.

If dividends are distributed to you, you can choose to

  • Receive them as cash
  • Apply them to your premium payments
  • Apply them to an outstanding loan
  • Use them to purchase additional life insurance coverage
  • Allow the insurance company to keep them while you collect interest on them

No matter what choice you make, the dividends will be considered a return of the premiums you have already paid, so in general they are not taxed. However, there can be exceptions.

For example, if you decided to keep the dividends with the insurance company to earn interest but then you eventually withdrew both the dividends and the interest made, the amount gained in interest can be taxed as income.

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Certain types of insurance companies can be more likely to distribute dividends compared to other types of insurance companies. While there are more than 2 different types of insurance companies, the most common types are stock insurance companies and mutual insurance companies.

Stock insurance companies are owned by shareholders. Since their goal is to maximize profit, dividends are less likely to be distributed to policyholders. 

On the other hand, mutual insurance companies are owned by the policyholders. Therefore, even though dividends are not guaranteed, several mutual insurance companies take pride in a long history of paying out a yearly dividend without fail. For example, Guardian provides this advertisement video stating how an annual dividend has been paid out to policyholders for over the last 150 years.

However, as noted in the small print at the bottom of the page under the Disclaimer section, Guardian still explains how a distribution of dividends is still not guaranteed. 

The distribution of dividends is not guaranteed each year because dividends are usually only distributed by the life insurance company if the company deems that it performed well enough financially to do so.

Furthermore, even if dividends are provided, Mass Mutual explains that it doesn’t guarantee that the same amount of dividends will be paid out each year. In fact, you can see here how the size of the dividends that many life insurance companies paid out have been gradually going down over the years.

Finally, even if the whole life insurance policy you purchased is with a company that does end up paying out a dividend to its policyholders, you may still not receive anything because many life insurance companies wait to begin providing dividends to policyholders until the policy has been owned for at least a few years. Again, check out the small printed footnote #2 under the Disclaimer section at the bottom of Guardian’s webpage explaining how dividends may not be paid out during the first two years of the policy ownership

Expenses:

Fees can be a major downside to permanent life insurance policies in general, as there are many of them and they add up quickly. Although not often readily advertised, to get a basic overview of both the type of expenses and how much these expenses can cost, you can take a look at all of the different expenses Nationwide advertises here. Do note that the policyowner must pay several of these expenses every month. 

These expenses can take a huge portion away from premium payments that would have gone into your cash value account, which is why it can take years until you break even and then start seeing some amount profit. 

Rate of Return on Cash Value Account:

A whole life insurance policy provides a guaranteed rate of return and a non-guaranteed rate of return. 

When these rates of return are advertised, it is tempting to focus on the higher non-guaranteed rate of return value when considering purchasing a policy. However, this value is just as advertised – not guaranteed. 

An article by Forbes recently estimated that guaranteed rates of return typically range between 1-2% while non-guaranteed rates of return range between 4-6%.

These ranges are difficult to pinpoint to an exact value because different whole life policies from different life insurance companies can advertise slightly different rates of return. Additionally, the rate of return can be influenced by the payment of dividends and the use of using such dividends to increase the value of your policy.

In the end, Consumer Reports estimates that the average rate return on a whole life insurance policy is in the range of only 1.5-3.5%.

Cost of Purchasing a Policy:

As explained by Guardian, in general, factors that influence the cost of purchasing a life insurance policy can include your health, age, gender, driving record, occupation, hobbies, the amount of coverage you are looking to purchase, and the type of permanent life insurance policy you’re are looking to purchase.

Whole life insurance is often much more expensive that term life insurance, because it is a permanent life insurance policy, and also more expensive than universal life insurance or variable life insurance because of the consistency it provides: a guaranteed fixed premium amount, a guaranteed death benefit amount, and a minimum guaranteed rate of return. 

WHAT ARE THE MAJOR CATEGORIES OF WHOLE LIFE INSURANCE?

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Whole life insurance is made up of two major categories: participating whole life insurance and non-participating whole life insurance. There is one distinct difference between these categories: Only whole life insurance policies falling within the participating category are eligible to receive dividends.

It is important to note that, as covered previously, receiving a dividend is not guaranteed even if you do purchase a participating whole life insurance policy. However, receiving a dividend does offer the potential to increase the value of your policy. Therefore, a participating whole life insurance policy is typically more expensive that a non-participating whole life insurance policy.

WHAT ARE THE MAJOR SUBTYPES OF PARTICIPATING AND NON-PARTICIATING WHOLE LIFE INSURANCE?

Within the categories of participating and non-participating whole life insurance there also exist subtypes of whole life insurance. Each of these subtypes provides a different opportunity for managing premium payments.

Ordinary/Level Premium Whole Life Insurance:

This subtype of whole life insurance is appropriate named as it allows the policyholder to pay premiums set at a fixed amount. This set-up can work well for someone seeking predictability with premium payments.

Limited Payment Whole Life Insurance:

This subtype of whole life insurance allows policyholders to finish making premium payments by a specified length of time. Common goals for this deadline are when a certain age is reached (ie 65 years old) or after a specified number of years (ie 10 or 20 years). 

However, reaching a point where no more premium payments are required means that the premium payments made during the specified period are much larger. In short, the payments are heavily frontloaded.

Single Premium Whole Life Insurance:

The option to make just one large premium payment without having any subsequent premium payments also exists. The single premium whole life insurance policy is geared towards policyholders looking to place a large amount of money into the cash value account so that growth in the account may occur more quickly. 

However, as reviewed when I discussed the similarities of the different major types of permanent life insurance policies, such a large transaction can lead to the Internal Revenue Service (IRS) labeling the policy as a Modified Endowment Contract.  

Indeterminate/Modified Premium Whole Life Insurance:

With this subtype of whole life insurance, the amount of premium due will be variable but never exceed a specified maximum amount. The variable amount is quite low for the first few years of the policy’s duration, typically just enough to cover the required costs to keep the policy in force. Over time, though, the premiums can increase or remain low depending on the life insurance company’s financial success. 

Therefore, this subtype is often geared towards those looking to purchase a whole life insurance policy with the need to keep initial expenses low. However, since only bare minimum premium payments are being made, there often isn’t much left over to contribute into the cash value account during this time. 

FINAL THOUGHTS. . .

Overall, as a type of permanent life insurance, whole life insurance combines life insurance and investing. It differentiates itself from other types of permanent life insurance by offering a level premium, a level death benefit, the ability to earn dividends and a guaranteed rate of return. 

Do you have any additional information to share on whole life insurance? Any questions on aspects that may not have been covered? Before moving on, please help make the Money Mobilizer a supportive and welcoming community for our current and future colleagues by leaving a question or sharing your knowledge below!  

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