Some Whole Life Policies

Whole life insurance is designed to provide protection for the entire life of the person insured. Cash values accumulate within the policy, money that the policy-owner can borrow against if desired. Also known as permanent- or ordinary insurance, these policies pay their face amount upon the death of the insured or when he or she reaches the age of 100, whichever happens first. Insurance companies consider this age to be the 'whole life' of an individual (thus the policy's name). Below are several common types of whole life policies.

Continuous premium whole life is the most common type of whole life insurance sold. As the name implies, these policies stretch the premium payments over the whole life of the insured (up to age 100). This type of policy is also routinely referred to as straight life insurance.

Limited payment whole life insurance affords the policy-owner the same full lifetime protection of continuous premium whole life, but without the perpetual payments. In other words, the policy-owner simply pays for the entire policy in a shorter period of time. (The premium for any whole life policy can be broken down into any desired number of installments.) Because the limited payment policy is fully paid sooner than a straight life policy, logic dictates that its annual premiums are higher than those of the straight life plan. With the accelerated premiums, the cash values of limited payment policies also build at a faster rate. This means that the loan value for a limited payment policy would be more than that of a straight life policy owned for the same amount of time.

Some common forms of limited payment whole life include 20-payment life (which means that premium payments are spread out over 20 years), 30-payment, and life paid-up at age 65 (the premiums are fully paid at age 65, but the policy continues to provide lifetime coverage). These policies mature (or pay out) at age 100 or upon the death of the insured, whichever occurs first.

Single premium whole life is a very specialized and extreme version of the limited payment plan, paying for the full policy with only one premium. Of course, this single payment could very well be many thousands of dollars. The advantage offered by a single premium policy is that the policy-owner pays less than if the premiums were stretched over many years. On the other hand, the risk of this type of policy is that the person insured could die shortly after the single premium was paid, thus making the cost of the insurance coverage much higher than it might have been had the premiums been scheduled over a long period of time.

Single premium whole life policies fall into the category of Modified Endowment Contracts (MECs). There are major tax consequences to be considered when purchasing a single premium policy, or any type of MEC.

Current assumption whole life policies (also known as interest-sensitive whole life) offer flexible premium payments that are indexed to the movements of current interest rates. The insurance company can increase or decrease the policy's premium within a certain range depending upon the fluctuation of market rates. During periods of relatively high rates, premiums could be reduced. In times of low interest rates, premiums could be increased within certain limits. Premium adjustments are generally only made on an annual basis, however.