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Whole life insurance offers guaranteed insurance for the duration of the policyholder's life. Such
policies include a tax-deferred cash value that increases until the contract has been surrendered.
Premiums for whole life insurance policies remain unchanged, and the policyholder has a
guaranteed death benefit.
Universal life insurance is much like whole life insurance, except that the protection, premiums
and cash value can all be adjusted during the term of the contract. The cash values also accrue
interest at a rate set by the insurance company.
Variable life insurance policies combine aspects of an investment fund with a whole life
insurance policy. A general account acts as the policy provider's liability account, and a separate
account is composed of several investment funds from the insurance provider's portfolio. The
policy is called a variable life insurance policy because the overall death benefit and value of the
cash can change.
A common practice is for an individual to take out a term life insurance policy as protection
against risk before investing his savings into a mutual fund, brokerage account or another type of
alternate investment.
Death benefit
The death benefit of a whole life policy is normally the stated face amount. However, if the
policy is "participating", the death benefit will be increased by any accumulated dividend values
and/or decreased by any outstanding policy loans. (see example below) Certain riders, such as
Accidental Death benefit may exist, which would potentially increase the benefit.
In contrast, universal life policies (a flexible premium whole life substitute) may be structured to
pay cash values in addition to the face amount, but usually do not guarantee lifetime coverage in
such cases.
Maturity
A whole life policy is said to "mature" at death or the maturity age of 100, whichever comes first.
To be more exact the maturity date will be the "policy anniversary nearest age 100". The policy
becomes a "matured endowment" when the insured person lives past the stated maturity age. In
that event the policy owner receives the face amount in cash. With many modern whole life
policies, issued since approximately 2000, maturity ages have been increased to 120.
Taxation
The entire death benefit of a whole life policy is free of income tax, except in unusual cases.[3]
This includes any internal gains in cash values. The same is true of group life, term life, and
accidental death policies.
Uses
Personal and family uses
Individuals may find whole life attractive because it offers coverage for an indeterminate length
of time. It is the dominant choice for insuring so-called "permanent" insurance needs, including:
Funeral expenses,
Estate planning,
Individuals may find whole life less attractive, due to the relatively high premiums, for insuring:
Large debts,
In the second category, term life is generally considered more suitable and has played an
increasingly larger role in recent years.
Business uses
Businesses may also have legitimate and compelling needs, including funding of:
1. Buy-sell agreements
2. Death of key person
3. Supplemental executive retirement plans (S.E.R.P.)
4. Deferred compensation
Level Premium
Level premium whole life insurance (sometimes called ordinary whole life, though this term is
also sometimes used more broadly) provides lifetime death benefit coverage for a level premium.
Whole life premiums are much higher than term insurance premiums, but because term insurance
premiums rise with increasing age of the insured, the cumulative value of all premiums paid
under whole and term policies are roughly equal if the policy continues to average life
expectancy. Part of the insurance contract stipulates that the policyholder is entitled to a cash
value reserve that is part of the policy and guaranteed by the company. This cash value can be
accessed at any time through policy loans that are received income tax-free and paid back
according to mutually agreed-upon schedules. These policy loans are available until the insured's
death. If any loans amounts are outstandingi.e., not yet paid backupon the insured's death,
the insurer subtracts those amounts from the policy's face value/death benefit and pays the
remainder to the policy's beneficiary.
Usage
Because term life insurance is a pure death benefit, its primary use is to provide coverage of
financial responsibilities for the insured or his or her beneficiaries. Such responsibilities may
include:
Both term insurance and permanent insurance use the same mortality tables for calculating the
cost of insurance, and provide a death benefit which is income tax free. However, the premium
costs for term insurance are substantially lower than those for permanent insurance.
]
Endowment policy
An endowment policy is a life insurance contract designed to pay a lump sum after a specific
term or on death. Typical maturities are ten, fifteen or twenty years up to a certain age limit.
Some policies also pay out in the case of critical illness.
Policies are typically traditional with-profits or unit-linked (including those with unitized withprofits funds).
Endowments can be cashed in early (or surrendered) and the holder then receives the surrender
value which is determined by the insurance company depending on how long the policy has been
running and how much has been paid into it.
made. This is because income is assessable when a person first has legal entitlement to it. It is
not necessary that the funds be actually received by the pensioner, as legal control over the funds
at the time that the policy matures is sufficient to satisfy the income test.