|Most people are familiar with whole life insurance. For many years whole
life policies were the predominant type of life insurance sold in
you purchase a whole life policy, you traditionally pay a fixed premium
for as long as you live, or for as long as you keep the policy in force. In
exchange for this premium, the insurance company promises to pay a set
benefit upon your death.
addition to providing a death benefit, whole life policies build cash
of your premium goes to the insurance company to pay for the pure
protection element of your policy. The remainder is invested in the companys
general investment portfolio. The insurance company will pay a guaranteed
rate of return on the balance of your policy that is in the investment
cash value buildup is part of the reason the premiums on a whole life
policy generally remain fixed for the duration of the policy instead of
increasing to match the increased risk of death. As the cash value within
your policy grows, the risk to the insurance company declines. Your stake
represents an increasing share of the face value of the
Although the cash value in your policy is "your" money, you
withdraw it as needed as you would with a savings account. You do have
access to your funds, though.
order to withdraw funds, you can either surrender the policy for its cash
value or take the needed funds as a policy loan.
outstanding loans will reduce the policys death benefit.
aware, though, that in addition to charging you a modest interest rate
for borrowing the funds, the insurance company may pay a lower rate of
return for that portion of your cash value that represents the amount you
borrowed. But policy loans are generally not taxable and can provide the
cash to help with unexpected expenses.
cash value on a life insurance policy accumulates tax deferred. If you
surrender the policy, youll incur an income tax liability at that time, but
only for those funds that exceed the premiums you have paid.
of the attributes that makes whole life policies so attractive to some
individuals troubles others. Thats the fixed premium and fixed death
some, this means one less thing to worry about. You know in advance what
youll have to pay in premiums and exactly what your death benefit will
others, this doesnt provide enough flexibility. If your situation
changes, you will likely be unable to increase or decrease either your
premiums or death benefit on your whole life policy without surrendering it
and purchasing a new policy.
level premium and fixed death benefit make whole life insurance very
attractive to some.
cost and availability of the type of life insurance that is appropriate
for you depends on factors such as age, health, and the type and amount of
insurance you need. If you are considering purchasing life insurance,
consult a professional to explore your options.
© 2003 Emerald