What is Whole Life Insurance & How Does it Work?

A Guide to Permanent Insurance & its Whole of Life Protection

Nov 9, 2009 Carol Finch

Those looking for a return on investment with life insurance often opt for a whole life policy rather than a term product. How does a permanent deal work?

Many people turn to whole life or permanent polices when looking for life insurance solutions. This kind of coverage suits some better than a standard term policy as it gives life-long protection and may give additional returns on premium investment. How does a whole life deal work and what options are available?

How Does a Whole Life Policy Work?

This kind of policy, as its name suggests, gives life protection for all of the policyholder's life. An alternative term policy, on the other hand, will be set up to last for a specific number of years. At the end of its term that life coverage will end. This is not an issue with whole life insurance, which is set up to give permanent protection until the policyholder dies.

One of the primary reasons that people take out whole of life policies is the fact that they are guaranteed to pay out at some point in the future (as long as the policyholder meets their payment obligations). A term policy, on the other hand, will only pay out the insured sum if the individual dies when their coverage is in force.

Are all Whole Life Insurance Policies the Same?

Although these kinds of permanent life products share the fact that they will make a payment whenever death occurs they may not all work in exactly the same way. There are a few different options with whole life coverage. For example, an individual could opt for:

Regular whole life coverage: Here the premiums paid will stay the same for the life of the policy and it will pay out a set sum upon death. The cash value that invested premiums make over the years generally go towards the higher costs that the policy will reach as its policyholder gets older. This ensures that they, however, don't have to pay more as the investment vehicle does this for them. This fund may also be used to cash in the policy if the policyholder decides to close it down.
Universal life coverage: This kind of policy is often considered to be a little more flexible than a regular whole life product. A policyholder here could, for example, ask for their insured sum to be increased if they wished over time, although they may need to pass a medical exam to do this. The cash value that may be accumulated may also sometimes be used to reduce premium costs over the years under certain conditions.
Variable life coverage: Here the life insurance's investment element can be invested. This is perceived as a riskier form of life insurance as the insured sum and any cash value that accrues will be based on stock and money market investments. This could see these sums rise a lot higher than they might with other whole life options. But, if markets don't do well then they could decrease sharply as well.

Although there may seem to be some obvious benefits to this kind of insurance, it may be worth thinking about other options and any downsides there may be before coming to a decision.

Things to Consider Before Taking out a Whole Life Insurance Policy

This kind of life insurance may give a guaranteed return on premium investment but this may also come at a price. Whole life policies are generally more expensive to take out than term life options. This is, in part, due to their guaranteed payment element, as well as the fact that early premiums may have to be set higher to compensate for rising costs later in life.

Consumers should try to compare the different types of coverage before opting for one solution. Looking at the differences between term and whole life insurance may be a good place to start. Those that remain unsure about which type of policy to choose could also consider starting out with a convertible term product which could then be changed to a whole life option if they do change their minds in the future.

Source: The Insurance Information Institute

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