What is Whole Life Insurance?

August 15th, 2011 | Author: Mitch Reynolds

What is Whole Life Insurance and How Does It Work

This article, what is whole life insurance, is the fifth articles in our “what is” series explaining the fundamentals of how different insurance policies work. To get a full list of all articles in this series, go to What is Insurance for the series overview.

Definition of What is Whole Life Insurance

What is whole life insurance? Whole life insurance or whole life is a permanent life insurance product in Canada. The life insurance remains in force for the insured’s whole life, and requires in most cases for premiums to be paid for the insured’s whole life.

How Whole Life Insurance Works

Whole life insurance consists of the original death benefit, the premium to be paid, dividends, a guaranteed cash value and an adjustable cash value. From the start of the policy the death benefit is in force and premiums must be paid. As the policy ages there is a growing guaranteed cash value and, depending on the type of whole life insurance, a dividend will be paid. The dividend depends on the performance of the entire fund of money managed by the insurance company for the benefit of all whole life policy holders (the par-fund). If there is a profit of the par-fund above expected returns (expected returns are guaranteed by the guaranteed cash value of the policy) then a dividend is paid out. You can use your dividend in four different ways (an article has been written on each dividend option):

Dividends that are not paid out of the policy will increase the cash value of the policy by adding to the adjustable cash value of the whole life plan. The guaranteed cash value and the adjustable cash value are added together for the total cash value of a whole life insurance policy.

Different types of whole life insurance

Non-Participating or Non-Par

All values related to the policy (death benefits, cash values, premiums) are usually determined at policy issue, for the life of the contract, and usually cannot be altered after issue.

This means that the insurance company assumes all risk of future performance. If future claims are underestimated, the insurance company makes up the difference. On the other hand, if estimates on future death claims are high, the insurance company will retain the difference.

Participating or Par

In a participating or par policy the insurance company shares the excess profits (called dividends Canada) with the policyholder. Typically these funds are not taxable because they are considered an overcharge of premium. The greater the overcharge by the company, the greater the dividend. For a mutual life insurance company, participation also implies a degree of ownership of the company (Canada’s last mutual life insurance company is Equitable Life).

Limited Pay

Similar to a participating policy, but instead of paying annual premiums for life, they are only due for a certain number of years, such as 20. The policy may also be set up to be fully paid up at a certain age, such as 65 or 80. The policy itself continues for the life of the insured. These policies would typically cost more up front, since the insurance company needs to build up sufficient cash value within the policy during the payment years to fund the policy for the remainder of the insured’s life.

Single Pay

A form of limited pay, where the pay period is a single large payment up front. These policies typically have fees during early policy years should the policyholder cash it in.

Whole Life Insurance Guarantees

The insurance company (insurer) generally will guarantee that the policy’s cash values will increase regardless of the performance of the company or its experience with death claims (again compared to universal life insurance which can increase the costs and decrease the cash values of the policy). Upon the death of the insured the insurance company will give the beneficiary the option of the “cash value” or the death benefit (which ever is higher).

A Whole Life Insurance policy is very safe in comparison to a universal life insurance policy. There is never going to be downside risk, but there is also never excessive growth even when the investment markets are doing very well. A whole life policy is best suited to an investor who wants safety and security and steady long term growth with minimal fluctuations.

What is Whole Life Insurance – find out more from Life Guard Insurance

If you need permanent life insurance but want simplicity and safety in your plan whoile life insurance might be right for you. Feel free to contact Life Guard Insurance to answer the question what is whole life insurance for your unique financial plan.

The article was written by Mitch Reynolds+. If you found this article interesting or it made you think, please feel free to share your comments below. Liking us on Facebook, giving us a +1 on Google or Tweeting this article, What is Whole Life Insurance, would also be very much appreciated.