Whole Life Insurance
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What exactly is whole life insurance? How does whole life insurance work? What is the cost of whole life insurance? Well, you might be familiar with term life insurance due to commercials you’ve see on television as term life insurance is by far the most popular type of life insurance. But there are other alternatives to term life insurance and one of those alternatives is known as whole life insurance (the other major type of life insurance being universal life insurance).
Although this article is by no means exhaustive of the topic, it will provide a good framework to get you started on choosing the right life insurance policy. Below follows a definition of whole life, an explanation of premiums, and the options that exist within this insurance form.
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What is whole life insurance?
At one time all life insurance policies were structured as term policies. This means that a policy is issued for a predetermined amount of time, and death benefits are paid out only if the insured dies during the term. When customers began to understand that they could pay into their policy for decades and never get anything out of it, many were reluctant to continue with life insurance. Yet, term life insurance still remains popular for parents with children for the term of time they have dependents at home, partially due to the lower rates.
Insurance companies developed whole life insurance for those who wanted to receive from policies before death. This insurance takes its name from the principle that coverage extends for the whole life of the customer, regardless of how long that is.
If you take out a whole life policy at age 40, and you live to be 80 years old, your policy will have been in force for 40 years. Had you died at any time within those 40 years the death benefit would still have been paid. If, on the other hand, you took out a 20 year term policy when you were 40, and you live until 80, neither you nor you beneficiaries get a dime.
How are premiums established for whole life insurance?
Premiums for whole life insurance are determined based upon actuarial estimates of life expectancy. Actuaries study trends regarding the causes of death and life expectancy. Using their data they are able accurately predict the life expectancy of the average American.
When issuing a whole life insurance policy, the insurance company consults the life expectancy tables then determines how much money needs to be paid into the policy in order to earn a decent profit. While there is no hard and fast rule, insurance companies tend to desire a profit of 30% or more.
What this means is that they must earn a profit of 30% over the agreed death benefit before such benefits are paid. They do this through a combination of investing and charging premiums. They then assume the risk that the customer will live to his full life expectancy.
Are there different kinds of whole life insurance policies?
There are several different types of whole life policies as defined by the various states. New York for example, divides whole life insurance into six categories. We will discuss just the first two; participating and non-participating.
With a participating whole life insurance policy, insurance companies overcharge on premiums throughout the life of the policy, and in return, share any dividends with the policy holder. Such earnings are not taxable for the policy holder because the government classifies them as overcharged payments. The tax benefits make participating policies rather attractive.
The non-participating whole life insurance policy is one where death benefits and premiums are agreed upon at the time the policy is issued. Once the policy is written changes cannot be made. The non-participating policy is a higher risk to the insurance company if life expectancy estimates are not accurate.
If the policy holder passes on before reaching the estimated life expectancy, the insurance company takes a loss on the policy. If he should exceed his life expectancy, the insurance company reaps additional financial benefit while premiums continue to be paid.
Where can I buy whole life insurance?
Whole life insurance can be purchased from any number of life insurance providers. But, due to the complicated nature of life insurance, you might be better off searching for a company that is dedicated solely to life insurance. They will understand all the intricacies involved in writing a policy effectively.
You can do an online search for life insurance companies who offer whole life policies, or you can check with a local agent who represents several different providers. Even if you decide to use a local agent, arriving armed with your own online insurance quotes will put you in a better buying position!
Rates will vary across different types of policies, so be sure to do your homework and understand what an individual policy provides. Be sure to purchase enough coverage to pay for your funeral expenses and replace lost income.
If you are in a position where family depends upon you financially, life insurance is something you need to think about. Consider whole life insurance if you have the financial means to afford such a policy. In the long run, the benefits outweigh the cost of premiums.
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