Whole Life Insurance Policies: There Are Many Kinds – Which Is Best for You?

Whole life insurance policies are designed to provide life insurance coverage for the entire life of the insured. We’ll explain several types of whole life insurance in this article, including participating and non-participating whole life insurance, limited payment whole life insurance, single premium whole life insurance, and high early cash value whole life insurance.

All types of whole life insurance offer death benefits that are guaranteed, and they usually have premiums that do not vary. In addition, all types of whole life insurance policies are designed to grow cash value that is tax-deferred.

As long as the premiums of a whole life insurance policy are paid and the policy has not been surrendered, the policy remains in force until the death of the insured.

Because the cash value is tax-deferred and the death benefit is paid income tax-free, whole life policies are frequently used as part of an estate plan for transferring wealth to beneficiaries with favorable tax treatment.

Consider a whole life insurance policy if you want to ensure that you have life insurance in place for your entire lifetime.

What Is Participating Whole Life Insurance?

A whole life insurance policy that pays dividends is called a participating whole life policy or a dividend-paying whole life insurance policy.

The dividends represent a share of the profits realized by the insurance company. The company cannot guarantee that dividends will be paid. However, there are companies that have paid dividends every year, without fail, for well over a century.

You may choose to receive your dividends in cash, you may use them to reduce your premium payments, you can leave them with the company and the company will pay you interest on them, or you may use your dividends to purchase paid-up additional insurance. These “paid-up additions” increase both the death benefit and the cash value of your policy.

What Is Non-Participating Whole Life Insurance?

A whole life insurance policy that does not pay dividends is called a non-participating policy.

Within these two broad categories – participating whole life insurance and non-participating whole life insurance – there are different types of whole life insurance. In this article, we’ll explore the most common types of whole life insurance policies…

Level Premium Whole Life Insurance

Level premium whole life insurance policies have premiums that do not increase or decrease over time. To maintain a policy in force, premiums must be paid as long as the insured individual is alive.

Limited Payment Whole Life Insurance

Limited payment whole life insurance policies give lifetime protection but require only a limited number of premium payments, such as for 10 or 20 years. Alternatively, limited payment plans can be based on the insured’s age. Common examples are plans that are fully paid for by age 65 or by age 85.

Because the premiums are paid over a relatively short period of time, each payment will be higher than with a plan that spreads the cost of insurance over the insured’s lifetime.

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Single Premium Whole Life Insurance

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Another type of whole life insurance is single premium whole life. These policies require only one premium payment, due when the policy is issued. This single, relatively large premium provides for an immediate cash value (and loan value) which could be significant.

This type of policy is usually characterized by the Internal Revenue Service as a Modified Endowment Contract (MEC).

If My Life Insurance Policy Is a MEC, What Does That Mean to Me?

If your life insurance policy is classified as a MEC, any pre-death distributions are taxed as “income first” (not basis first), meaning they are taxable to the extent of gain in the policy. In addition, distributions are subject to a 10% additional tax, unless the policy owner is age 59½ or older or has become disabled.

When the insured passes away, the death benefit goes to the beneficiaries without payment of income taxes.

A Modified Endowment Contract has other benefits, as well:

  • Gains are not taxed until you take them out. Until then, they grow tax-deferred. That makes it possible to avoid paying taxes on the growth each year.
  • Gains that exceed your cost basis (the premium you paid) are taxable, but until your cash value exceeds your cost basis, taking a loan or a withdrawal does not create a taxable event.
  • You can know the guaranteed minimum value of the policy at any given point in time.
  • The death benefit avoids probate. The expense of probate is based on the gross value of the estate, so keeping something out of probate saves money – between 4% and 10% of the value of your estate, according to an AARP study. This also means the death benefit can be paid quickly – long before the one to three years it typically takes to settle an estate in probate.
  • In many states, MECs are protected from creditors. As one advisor puts it, “In a society where everyone is suing everyone else, don’t you think you should own something untouchable?”
  • Many MECs provide access to some or all of the death benefit before death, if you have a catastrophic or terminal illness. And some MECs provide benefits for long-term care.

Single-Premium Whole Life Insurance Can Be Very Helpful for Seniors

Single-premium whole life insurance policies are a type of whole life insurance that can be useful in many stages of life, and they can be particularly useful to older individuals.

For further information on how seniors can benefit from single-premium whole life insurance, read our article, Bank On Yourself for Seniors.

Indeterminate Premium Whole Life Insurance

An indeterminate premium whole life policy is similar to an ordinary whole life insurance policy, except that the insurance company can adjust the premiums up or down.

An indeterminate whole life policy has two different premium rates. It has a “maximum guaranteed rate” and a rate that’s lower than that maximum rate. Think of an adjustable rate mortgage – or a credit card with a “teaser” rate – and you’ll have an idea of how it works.

With an indeterminate premium whole life policy, you’ll pay the lower premium rate when you first take out the policy, and the insurance company will guarantee that rate for a certain number of years. After that, the rate may vary from year to year. The rate will be based on the insurance company’s actual mortality, interest, and expense experience. In theory, the new rate could be lower than the initial rate, but it could also be higher, up to the maximum guaranteed rate.

Some companies refer to this type of whole life insurance policy as a “nonguaranteed premium whole life insurance policy.” Other companies call it a “variable premium whole life insurance policy.”

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High Early Cash Value Whole Life Insurance

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High early cash value whole life insurance policies are designed so that much of your annual premium goes to the purchase of paid-up additions, using a paid-up additions rider. As we discussed earlier, these paid-up additions increase the death benefit and the cash value of your policy.

High early cash value whole life insurance policies are typically dividend-paying policies in which the dividends are used to purchase more paid-up additional insurance.

We should note that even though these policies build cash value more quickly, the premiums for a high early cash value whole life insurance policy are not necessarily higher than for a policy designed without a high early cash value objective.

Then Where Does the Money Come from to Build High Early Cash Value?

A life insurance advisor receives a much smaller commission on the portion of the premium used to purchase the paid-up additions, which means that for the same premium outlay, you are able to build both your death benefit and your cash value more quickly.

An advisor who recommends a high early cash value whole life insurance policy knows he or she is taking a commission cut of up to 70%, but believes that it’s in your best interest to build cash value quickly.

With a typical whole life insurance policy, your cash value grows very slowly. It may be several years before you have any cash value at all. But many high early cash value life insurance policies give you cash value the very first month.

See this article for more information about whole life insurance policies designed to provide high early cash value. A policy designed this way results in both the maximum cash value and death benefit over time. Unfortunately, many advisors will not tell you about this, because they have to take a commission cut of 50% or more to design your policy this way.

Here’s how to find a life insurance advisor willing to take a commission cut to design a policy for you that will maximize the growth of both your cash value and your death benefit.

Joint Life and Survivor Whole Life Insurance

Another type of whole life insurance is joint life and survivor whole life insurance. These policies provide life insurance coverage for more than one person, typically for a couple. These policies are less expensive because the insurance company knows it could be a much longer time before the policy is called upon to pay benefits.

One use for this type of policy is for parents providing care for a disabled dependent. The policy would provide a death benefit to be used to provide care after both parents have passed away.

A special type of joint and survivor policy pays the death benefit after the first insured passes away, rather than after the second. This could be helpful if, for example, the incomes of both individuals are being used to pay down a loan. When the first of the two dies, the death benefit is available to pay off the loan.

Level Death Benefit Whole Life Insurance

A whole life insurance policy with a level death benefit pays the same amount to beneficiaries whether the insured person dies soon after taking out the policy or after many years. The premium is also usually locked in.

This means that if someone purchases their policy at a younger age, they can end up paying a relatively low premium for life.

Why You Need to Work with an Experienced and Qualified Advisor When You’re Considering the Purchase of Life Insurance

Simple term life insurance policies are often sold “vending machine” style. Pick your term, pick your death benefit, and the insurance company will spit out a policy for you.

Whole life insurance policies do not come out of a vending machine.

As you’ve seen in this article, there are many variations. The distinction between basic whole life and high early cash value whole life insurance is vitally important, for example.

Then you have policies that pay dividends versus those that don’t, single premium policies, level premium policies, 10-pay policies, and so forth. A qualified and experienced life insurance advisor can help you sort through your options.

Bank On Yourself Authorized Advisors are specifically trained to be experts in the area of dividend-paying high cash value whole life insurance. Each Bank On Yourself-type life insurance policy is unique.

A good advisor is like a good doctor: He won’t prescribe a treatment until he thoroughly understands the problem. A Bank On Yourself Authorized Advisor will want to explore your situation with you carefully and thoroughly. You’ll get a thorough “fiscal exam” from a Bank On Yourself Authorized Advisor – an analysis that too many other advisors simply don’t provide. You’ll know, as hundreds of thousands of “Bank On Yourselfers” know, that you have a plan that’s right for you.

To learn more, get our free Report, 5 Simple Steps to Bypass Wall Street, Beat the Banks at Their Own Game and Take Control of Your Financial Future.

And to find out how a custom-tailored whole life insurance policy can help you reach your financial goals and dreams, request your FREE Analysis here now, while it’s fresh in your mind!

Continue to the Table of Contents for the No-Nonsense Life Insurance Guide