On the term life insurance page we discussed how 99% of the time when you’re thinking about life insurance in the most common sense you’re probably thinking about Term Life Insurance, but there is another type of life insurance that provides an interesting flavor which cannot be ignored.
Whole life Insurance is a life insurance policy that will remain in force for the insured’s entire life and requires premiums to be paid every year into the policy as an investment.
There was a time when all life insurance was term life insurance, but because term life insurance only pays out a claim upon the death of the policy holder a number of policy holders grew upset over the idea that they could essentially be paying premiums for 20-30 years with nothing to show for it as their beneficiaries only see any results post mortem.
Due to growing pressure actuaries created an insurance policy with level premium payments that were more expensive than traditional term insurance contracts. These contracts would offer cash value which would be designated to be a cash reserve that would build up against the known claim (the known claim being the death benefit). These policies would also accrue interest on the cash value account and upon maturity of the contract the cash value would equal the death benefit (normally this is when the policy holder turns 95 or 100 years old).
That interesting arrangement produced a benefit to the policy holder and the insurance provider. By guaranteeing the death benefit the policy owner was assured insurance coverage would be in full effect when they died. The insurance company also benefited because they made a 30% surcharge on every premium payment made; this agreement creates a position where the insurance company is able to increase the cost of insurance while keeping premiums the same.
There are several different types of whole life insurance policies as defined by the State of New York, these can be broken down into six traditional forms: (We will be adding detailed descriptions and histories for each of the types of whole life insurance within the near future.)
Economic
Indeterminate Premium
Interest Sensitive
Limited Pay
Participating
Non-Participating
Single Premium
