A whole life insurance policy is designed to provide insurance protection for the whole of life (i.e. from the date of issue until the death of the insured) as long as the premiums are paid. It not only provides insurance protection, it also accumulates cash value.
The policy face value and premium rates are set at the issue date and remain level for the term of the contract. During the early years of the policy, the policyowner is younger and, because of the level premium rates, an more premium is paid in the early years than is required to fund the insurance. By guaranteeing an interest rate for those funds, the policy earns cash value at a rate designed to endow by the time the policyowner reaches the age of 100. Because very few people live to be 100, the whole life insurance policies will most likely either be surrendered for the cash value or the death benefit will be paid when the policyowner dies.
Since the policy has cash value, the policyowner can borrow the funds by paying a low interest rate. If an outstanding loan is not repaid at the time of death of the policyholder, the beneficiary would receive the face amount less the amount of the outstanding loan and any unpaid interest due on the loan. However, if the policy lapses for failure to pay the premiums or is surrendered, any outstanding loan is considered a taxable gain. Care must be taken to not over-borrow from the loan and to leave enough cash value in the policy to sustain the policy if the insured lives to an old age. Additionally, the policy itself, since it has value and is considered property, can be used as collateral or security for loans. Death benefits are paid to the beneficiary free of income taxes. Life insurance is the only plan that can make this guarantee. The basic forms of whole life insurance policies are:
Note - to avoid becoming a Modified Endowment Contract there are certain rules and tests limited pay and single premium policies must follow. |