Define Whole Life Insurance

Unless you ask an insurance expert to define whole life insurance, it can be a complicated type of life insurance policy to understand.

Types of Life Insurance

How to Define Whole Life Insurance

Whole life insurance is a controversial form of life insurance. It is controversial because experts disagree on whether it is preferable to term life insurance. Understanding this disagreement can help you to understand the definition of whole life insurance.

What is Whole Life Insurance?

There are two basic types of life insurance, term life and whole life:

• Term Life Insurance is exactly what it sounds like. This form of life insurance keeps you insured for the term that you've purchased the insurance for. You can purchase a policy for the term of one year all the way up to a term of thirty years. The benefits are also simple. If you die before the term is over, your beneficiaries receive payment of the value of the policy. If you live beyond the term of the policy, you are no longer insured by the policy and your beneficiaries receive no payout upon your death. While this may sound like the less favorable option, there are situations where term life would be a preferred choice.
• Whole Life Insurance is a form of insurance that combines the benefits of term insurance with a "cash value" - or savings portion - of the policy. This means that when you purchase a whole life insurance policy you are covered for your "whole life," meaning that there's no term when the policy ends. A whole life insurance policy builds up what's called "cash value" over time from the interest that your premiums earn. This cash value ends up paying for the premium after a few years, so that the policy doesn't cost anything after a while. Additionally, the interest growth of the premium is tax-deferred.

The Details of Whole Life Insurance

Whole life insurance can be more complicated than term life. To add to the confusion, there are also several types of whole life policies that you can purchase:

• Participating: This type of whole life policy includes dividends that the company pays out to policyholders, adding to the cash value of the policy. A non-participating policy does not include dividends, and all terms of the loan are determined and fixed at the start of the policy.
• Variable "Indeterminate" Premium: This policy includes a variable premium that can change each year, but not beyond the maximum premium as defined at the start of the policy.
• Single Premium: This type of policy involves an up front payment for the policy, typically an option of customers with enough funds to pay for it.
• Variable Benefit: Also known as an "economic" policy, this form of whole life involves a combination of whole life and term life, where each additional new term is purchased by the cash value. This often results in variable cash value growth from term to term.

Many insurance companies offer additional or fewer varieties of whole life insurance products. These include different variations using variable terms, premiums or interest rates. It's important to be sure that you understand all of the terms and conditions of the policy before you purchase such an insurance product.

How to Choose Between Term Life and Whole Life

The variety of whole life policies and the differences between whole life and term life insurance can sometimes make it difficult to decide which type of life insurance is the one for you. Many experts agree that for younger individuals who are married and just starting their families, whole life is a worthwhile option because the length of time available to earn enough cash value to pay for premiums in future years makes the policy and growth of the policy over time very valuable. This assumes, however, that you can afford the more expensive early premiums associated with a whole life insurance policy.

If you are young and healthy, and require life insurance but can't afford the premiums of whole life, term life is a very affordable option. In fact, many experts believe that term life is the better option overall because the premium savings in the early years could be invested into higher paying products with a higher return than whole life policies offer.

Expert Help

Regardless which life insurance product you choose, it's always a good idea to seek the advice of a professional and certified insurance agent who can help you choose the insurance product that suits your specific life circumstances and needs. You may need a knowledgeable insurance agent to walk you through how the policy works and the options that are available to you.

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