Whole life insurance, also called “whole of life” insurance, sometimes also known as “continuing life” insurance or “normal life” insurance, is a life insurance plan that is guaranteed to stay in force for an entire lifetime, usually through paid premiums, to the policyholder’s death date. The premium amounts vary from one company to another. Some whole life policies last for a lifetime and others are renewable. A typical whole life policy will pay the named beneficiaries a certain amount in return for regular premium payments.
A whole life insurance policy provides two distinct advantages over other forms of coverage. First, there is the cash value component, which accrues with each renewal. Second, the policyholders receive a death benefit, which can be used for funeral expenses and the repayment of outstanding debts. Usually, the cash value is tax-exempt when received. However, it may have federal and state tax implications should the beneficiary not receive a minimum guaranteed minimum benefit each year.
Most whole life policies include a variable universal life (VUL) and a variable universal life (UUL). The term “guaranteed” refers to a portion of the premium which remains unused by the insurer. The remaining amount is invested by the insurer in either an interest-bearing account or a certificate of deposit. In most cases, both types of deposits have grown in value since the inception of the whole life insurance policy. The URF portion of the policy pays the cost of a death benefit should the insured die during the policy’s lifetime. In contrast, the UL does not pay a death benefit but is instead invested.
An additional feature of URF is that it allows the policyholder to borrow against the cash value, which may be accessed through the means described above. As with all life insurance contracts, the contract holder must meet specific investment requirements. Examples of these requirements are the policyholder’s income, the policyholder’s age, the amount of death benefit paid and the total value of the premiums. It is important to note that cash values do not accrue, as with variable Universal Life policies. Furthermore, the URF may be borrowed against, but if so, the borrower must use the cash value as the form of payment.
Universal Life Insurance also includes features that allow the policyholder to convert funds into tax-free income and automatically make payments to qualified beneficiaries. If the insured has an existing retirement account, the account can be converted into a Roth IRA. In this case, the conversion is treated as a taxable event for income taxes. However, the account may also convert into a non-taxable event, provided the premiums have been paid in full and for a reasonable period of time.
The premiums and the guaranteed dividends are both tax-qualified investments, but they are treated separately for financial reporting purposes. Premiums and dividends are not required to be reported until they are invested in a tax-deferred account, which guarantees a tax-qualified interest. The life insurance companies must report the guaranteed or return dividends either on or before the due date each year. Reporting for both tax-qualified and non-taxqualified interest allows the insured to track his or her portfolio of investments.
Some policies provide that the premium be paid in three payments. The minimum payment will be equal to twice the face value of the policy, divided by the total number of years the policy is in effect. In addition to being able to calculate the amount of dividends and premiums paid over time, the insured can assess his or her cash flow from the life insurance company.
The term of a whole life insurance policy is the agreed upon amount of time a person will be covered by the insurance. This coverage amount is usually for twenty years. Policy coverage amounts and premiums are subject to change yearly, quarterly within a year, and in some cases, annually within three years of the policy’s effective date.