Definition of Whole Life Insurance

Whole life insurance, also known as “cash-value” insurance is a basic and consistent type of permanent life insurance which remains in effect your entire life at a level premium. This life insurance is a good choice got you if you do not expect your life insurance needs to diminish over time. A portion of your premium goes into a reserve fund called ‘cash value’ that builds up over the years your policy is in affect. Your reserve fund is tax-deferred and you can borrow against it, until you withdraw it.

The premiums must generally remain constant over the life of the policy and must be paid periodically according to the amount indicated in the policy. You may also have the option of a single premium -- paying all of the premiums at once with a single lump sum. Your cash values will grow to equal the amount of the death benefit when you turn to age 100.

Although, whole life insurance is very expensive, and if you're on a limited budget, you may not be able to afford all the insurance coverage you actually need. But the plus point is that the death

benefit is guaranteed as long as premiums are met. Also death benefit will never decrease if you don't borrow against it.

Whole life insurance policy's returns will fluctuate with the markets and will usually follow returns

available from other investments like equity mutual funds. However, if you decide to quit your policy, your cash value can be paid in cash or paid-up insurance.

Whole life insurance is most suitable for you, if you want to:

•    use it as a tax and estate planning vehicle,
•    accumulate cash value for a child's education or retirement,
•    pay final expenses,
•    provide money for a favorite charity,
•    fund a business buy/sell agreement,
•    provide key person protection. 

Before buying the whole life insurance, you need to think carefully about choosing your level of

coverage. Too often people make the mistake of insufficiently covering or even worse, financially

overextending themselves. This would be a tragic error with whole life insurance policy because

defaulting on premium payments can mean policy cancellation and the loss of your entire investment. So be careful and make sure you:

•    pick a life insurance policy that has a guaranteed cash value starting at the very first year,
•    choose the one with the highest cash value in the very first year,
•    consider "participating" insurance policies which can pay dividends, increasing your policy's value by boosting both the total cash value and the death benefits,
•    beware of any insurance policy that levies "surrender charges" when you cancel.
•    if you ever need to stop paying premiums, your policy lets you use the accumulated cash value of the life insurance policy to pay the premiums, thus keeping your coverage current.

Advantages of a Whole Life Insurance Policy

To begin with, you need to understand that life insurance falls into two very broad categories: Whole and term.  The basic difference between term and whole life insurance is this: A term policy is life coverage only.
In whole life insurance policy, as long as one continues to pay the premiums, the policy does not expire for a lifetime.  As the term applies, whole life insurance provides coverage for the whole life or until the person reaches the age of 100.  Whole life insurance policies build up a cash value (usually beginning after the first year).  With whole life, you pay a fixed premium for life instead of the increasing premiums found on renewable term life insurance policies.  In addition, whole life insurance has a cash value feature that is guaranteed.  In term and whole-life, the full premium must be paid to keep the insurance. 

With level premiums and the accumulation of cash values, whole life insurance is a good choice for long-range goals.  Besides permanent lifetime insurance protection, Whole Life Insurance features a savings element that allows you to build cash value on a tax-deferred basis.  The policyholder can cancel or surrender the whole life insurance policy at any time and receive the cash value.  Some whole life insurance policies may generate cash values greater than the guaranteed amount, depending on interest crediting rates and how the market performs.  The cash values of whole life insurance policies may be affected by a life insurance company's future performance.  Unlike whole life insurance policies, which have guaranteed cash values, the cash values of variable life insurance policies are not guaranteed.  You have the right to borrow against the cash value of your whole life insurance policy on a loan basis.  Supporters of whole life insurance say the cash value of a life insurance policy should compete well with other fixed income investments. 

Unlike term life policies, whole life insurance provides a minimum guaranteed benefit at a premium that never changes.  One of the most valuable benefits of a participating whole life insurance policy is the opportunity to earn dividends.  The insurance company based on the overall return on its investments sets earnings on a whole life policy.  In addition, while the interest paid on universal life insurance is often adjusted monthly, interest on a whole life policy is adjusted annually.  Like many insurance products, whole life insurance has many policy options. 

Make sure you can budget for whole life insurance for the long term and do not buy whole life insurance unless you can afford it.  You should buy all the coverage you need now while you are younger, and if you cannot afford whole life insurance, at least get Term.  That is why whole life insurance policies have the highest premiums it is insurance for your whole life, no matter when you pass on.  The level premium and fixed death benefit make whole life insurance very attractive to some.  Unlike some other types of permanent insurance, with whole life insurance, you may not decrease your premium payments.