Whole life insurance policies continue to provide insurance as long as premiums are paid, and not only provide benefit to a beneficiary if the policyholder dies, but also retain a cash value, which accumulates savings for the policyholder over time. For this reason, such policies can be more expensive than term insurance, and are sometimes referred to as cash-value life insurance. A whole life insurance policy offers a lower return than many other investments, but may still be desirable as it also provides life insurance.
If the policyholder decides to terminate the policy, he/she can withdraw the cash value of the savings that have accumulated over time. The amount by which the cash value exceeds the premiums paid is subject to taxes. If the policyholder dies, the beneficiary receives the cash value and the policy death benefit.
The premium on whole life insurance is constant for the duration of policy. In the earlier years, a portion of the premium paid for the insurance reflects the potential payout to a beneficiary, and the remaining portion is invested by the insurance company as a form of savings. The portion dedicated to saving is high in the earlier years and in the later years the premium required to insure against possible death is relatively high, as the likelihood of death is greater. Since the insurance premium is constant, it is not sufficient to cover the amount needed to insure against possible death in the later years, so a portion of the cash value is used to supplement the premium paid in these years.
Many alternative forms of whole life insurance are available, so policyholders can structure the premium payments in a manner that fits their needs. Some forms also specify higher insurance benefits for the beneficiary in the earlier years and lower benefits in the later years. The premiums for whole life insurance are higher than premiums for term insurance. The advantage of this scheme against term insurance is that it not only provides insurance against possible death, but also accumulates savings over time.
The savings generally come by investing in different mutual funds. After a period of about ten years, the growth of the investment fund is reviewed, and if the growth is not sufficient to maintain the premium level it is adjusted by increasing the premium. This is called 'unit-linked whole of life insurance'. In another variation, which is called 'with-profits whole life insurance', the policyholder is allowed to participate in a 'with-profit' fund, where each year a bonus amount is added, with the sum thus increasing cash value. These bonuses securely increase the basic guaranteed sum assured.
Author Yvonne Fletcherdate added 2009-09-01 09:49:08