Tuesday, February 10, 2009

Whole Life Insurance - Understanding the Policy

Why would someone buy whole life insurance? After all, term insurance cost much less. Can one justify paying more premiums for the same death benefit? Why would a buyer even consider such a purchase? Let us examine the facts. Let us try to uncover the things that nobody wants you to know.

The Premiums

Yes, you would, initially, need to put out more for your whole life policy than you would for therm insurance. I say initially because, as you will learn, further down this page you can use your dividends to reduce premiums. This means that you would pay less than the premiums contracted for. That is if the company pays a dividend.

The Death Benefit

You whole life policy pays the face amount of the policy to a named beneficiary upon the death of the insured. This money can be paid in one lump sum or in income form. You can keep your policy for as long as you choose, even to age 100. The life of term policies are limited to specific periods. The death benefit of whole life insurance never decreases. So regardless of how you die your whole life policy will pay the sum you are insured for.

Cash Values

Whole life insurance policies have cash values or cash surrender values. Here is how this works. If you keep you policy for a specific period of time you will begin to build up guaranteed cash values. These cash values pay a guaranteed interest rate each year. This can amount to quite a considerable sum over time, even more so when added together with the dividends. Dividends, however, are not guaranteed.


You whole life policy may earn a dividend each year. If the life insurance company you have your policy with performs well they will pay a dividend on your policy. If they keep down expenses and are effective with their investments they transfer much of this profit to the policy owner in the form of a dividend. Dividends can be paid in different forms. Here are your options.

Paid In Cash

You may take your dividend in cash. Each year, usually beginning with the second or third policy year the life insurance company will send you a check for the amount of dividend that is applied to your policy.

Accumulate At Interest

You may choose to leave your dividend with the company to accumulate interest for as long a period as you desire. Whenever you choose to take it you can.

Purchase Paid Up Additions

You have the option of electing to apply your dividends to purchasing paid up additions. Paid up additions are tiny single premium whole life policies. They have a cash value and continue to earn interest. They also have proportionate dividends applied to them.

Premium Reduction

As mentioned above you may use your dividend to reduce your premium. If you elect to apply them in this manner you will pay less in premiums than you initially expected to.

As you can see whole life insurance is quite different from term life insurance. A term policy pays only upon the death of the insured. With whole life insurance there are benefits gained if you live a long and healthy life. There is definitely a choice as to the type of policy you buy. It is all up to you.

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