Whole Life Insurance
What Is Whole Life Insurance?
Whole life insurance, also known as traditional life insurance, provides permanent
death benefit coverage for the life of the insured. In addition to paying a death
benefit, whole life insurance also contains a savings component in which cash
value may accumulate. Interest accrues at a fixed rate and on a tax-deferred basis.
Whole life insurance policies are one type of permanent life insurance. Universal
life, indexed universal life, and variable universal life are others. Whole life
insurance is the original life insurance policy, but whole life does not equal
permanent life insurance as there are many types of permanent life.
Key Points
*Whole life insurance lasts for an insured's lifetime, as opposed to term life
insurance, which is for a specific amount of years.
*Whole life insurance is paid out to a beneficiary or beneficiaries upon the
insured's death, provided the policy was in force.
*Whole life insurance has a cash savings component, which the policy owner
can draw or borrow from.
*The cash value of a whole life policy typically earns a fixed rate of interest
*Outstanding policy loans and interest reduce death benefits.
Understanding Whole Life Insurance
Whole life insurance guarantees payment of a death benefit to beneficiaries in
exchange for level, regularly-due premium payments. The policy includes a savings
portion, called the “cash value,” alongside the death benefit. In the savings
component, interest may accumulate on a tax-deferred basis. Growing cash value
is an essential component of whole life insurance.
History of Whole Life Insurance
From the end of World War II through the late 1960s, whole life insurance was the
most popular insurance product. Policies secured income for families in the event
of the untimely death of the insured and helped subsidize retirement planning. After
the passing of the Tax Equity and Fiscal Responsibility Act (TEFRA) in 1982, many
banks and insurance companies became more interest-sensitive.
Individuals weighed the benefits of purchasing whole life insurance against
investing in the stock market, where annualized return rates for the S&P 500 were,
adjusted for inflation, 14.76% in 1982 and 17.27% in 1983.
Term Insurance became the insurance policy of choice for many families in the 1980's.
Whole Life is still the insurance of choice for those who want the peace of mind of knowing
that their coverage will be there until their passing.
