Whole Life Insurance

Last Updated 6/23/17

Issue: Whole life insurance is the most common type of permanent life insurance. It provides a fixed amount of insurance coverage over the life of the insured, with the benefits payable only upon the insured’s death. Premiums remain fixed over the payment periods as defined by the terms of the policy contract. Most often the premium is payable for the life of the contract. However, some policies offer shorter premium payment periods (such as 20 years or until age 65) for a higher periodic premium payment. Whole life premiums may be paid in annual or more frequent modes. Whole life policies are designed to build tax deferred cash value, which is the accumulation of premiums collected less applicable expenses and applicable insurance charges. Cash values are guaranteed and held on the insurer’s general accounts, which ensures the values are backed by the insurer’s assets.  Like other types of permanent life insurance, whole life policies allow for borrowing against the cash value of the policy.

As mandated by state-law, whole life policies contain nonforfeiture values payable in cash or some other form of insurance in the event the policy lapses from nonpayment of required premiums or the policy owner decides to surrender the coverage. Policyholder benefit choices include either an amount of paid-up term life insurance, a lesser amount of term coverage for the remainder of the benefit period; the cash surrender value or annuitization. Nonforfeiture values can be found in a schedule within the policy. Some policies provide for the payment of policy dividends.

Types of Whole Life Insurance Policies: Whole life insurance can be sold as a nonparticipating or participating policy. A nonparticipating policy does not pay dividends to the policy owner. The insurer sets the level premium, death benefits and cash surrender values at the time of purchase. These amounts are fixed at policy issue. A participating policy allows the insured to share in the insurers Investment, expense and mortality experience by providing dividends, which can be received in cash, used to reduce premium payments or to purchase paid-up additional insurance. The dividend options make these policies more flexible than nonparticipating policies, but the policies are also typically more expensive.

Indeterminate premium whole life insurance is a type of nonparticipating whole life policy featuring adjustable premiums. Premiums are set annually and reflect the insurer’s mortality experience, investment earnings and expenses. Premium increases can never exceed the guaranteed maximum rate. Premiums generally start out lower than other whole life insurance types and then increase or decrease over time. For this reason, they can be a good fit for an insured who anticipates their salary will rise over time.

Ordinary level premium whole life insurance is the most frequently purchased type of whole life insurance. These policies are also referred to as ordinary life or straight life insurance. Their premium payments remain consistent until the death of the insured or the insured reaches a terminal age (typically 100), when the cash value equals the face amount of the policy. The cash value is generated by the investment of excess premium amounts in the earlier years of the policy, when the mortality cost is lowest. Growth in the cash value account allows the insurer to offset the premium deficiency that would otherwise result from the increasing mortality cost commensurate with the aging of the insured.

Limited payment whole life insurance can be either participating or nonparticipating. It is similar to ordinary life insurance except it allows the policy owner to pay a premium over a shorter period, while still retaining lifetime protection. Premiums are fixed for a predetermined number of years (such as 10, 15, or 20) or to a certain age (such as age 65). These policies have higher premium amounts and accrue cash value faster than ordinary life policies, since they are paid over a shorter period. This type of whole life insurance is a good fit for policy owners hoping to reduce their post-retirement premium outlay and for those considering estate planning.

Single premium whole life insurance is a limited payment whole life policy that allows insureds to purchase guaranteed lifetime protection for a single upfront lump sum payment. These policies are paid up at the time of purchase and thus have an immediate cash value. The single premium amounts required to pay up these policies are quite large and additions are not allowed. The availability of a large cash value make these policy types best suited for insureds looking to fund investment needs, such as retirement or long-term care.

Status: Life insurance and annuities are regulated by state insurance commissioners. The NAIC encourages states to adopt model laws and regulations designed to inform and protect insurance consumers. The NAIC Life Insurance Disclosure Model Regulation (#580) requires insurers to deliver to purchasers of life insurance information that will improve the buyer’s ability to select the most appropriate plan of life insurance for the buyer’s needs and improve the buyer’s understanding of the basic features of the policy that has been purchased or is under consideration. The NAIC Life Insurance Illustrations Model Regulation (#582) provides rules for life insurance policy illustrations that will protect consumers and foster consumer education. The NAIC Consumer Credit Insurance Model Regulation (#370) protects the interests of debtors and the public by providing a system of rate, policy form, and operating standards for the transaction of credit life insurance.