What is whole life insurance?
Whole life insurance is part of what is called permanent life insurance. It provides coverage over the life of the insurance. It does not expire or require renewal and cannot be cancelled by the company unless you do not pay the premiums.
Premiums
Often the premium is level over the life of the contract.
Premiums are set based on longterm assumptions around investment returns, expenses and mortality cost. The insurance company will project out how much this will cost over the lifetime of the contract.
The part of the premiums that is above the cost of death are invested for the company.
Premiums can be paid annually, semi-annually or quarterly or monthly. The cost does increase a little as you move away from the annual cost. Many people find it easier to manage to do monthly payout.
Death benefit options (Guaranteed or adjustable)
Guaranteed
- The death benefit and premiums do not change over the life of the policy. Even if the insurance company’s cost goes up and mortality costs increase, it stays the same.
Adjustable
- The death benefit and premiums become adjustable based on experience. The death benefit and premiums are guaranteed for a time, then reviewed and adjusted. This can increase or decrease the amounts.
Nonparticipating vs participating polices
This is about how the surplus of cash is handled. A surplus of cash may occur if the cost is down, or investments are higher.
In Non-participating polices – after making sure the provincial requirement of reserves levels in the policy is kept. The insurance company keeps the surplus as profit. If there is a shortfall, the company bears the burden of that shortfall.
In participating polices- the company will use some of the surplus to keep the reserves at the level required by law. However, if not needed there, the surplus may be distributed to the policy holder.
Different payment options are available for such policies (reduction in premium, accumulation, paid-up, term insurance, death benefits and cash values.
For example, if one chooses a paid-up option. the annual policy dividend could be used to purchase an additional amount of death benefit or help cover the premiums.
Limited payment whole life
There are different payment options from ongoing, to single to limited. The idea of limited works like this, lets say at age 45, you buy a life policy, but you buy a 25-pay. This means you pay for 25 years, and at 70 the premiums stop, but you have coverage past the age of 70.
Cash Value
The policy over time will build a cash along side the policy that grows tax free. This can be used for different things such as a loan. The owner if they were to surrender the policy before death would be entitled to a portion of this cash value.
Where to start
It is good to start with a financial review of where you are at and what you will need. There is no need for getting something you do not need.
Contact me today about getting a free financial analyst.