Whole Of Life Insurance Explained

Explanation Of How Whole Life Policies Work

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Whole of life insurance is really what some people call whole life insurance. As the name implies this type of life insurance can be kept for your entire life or up until age 100, whichever comes first.

As opposed to term insurance the premium is very high. There is a very good reason for that, however. When you buy term insurance you buy a policy for a specific period of time.

You buy your policy for 1, 5, 10, 15, 20, 25 or 30 years. The longer the period or term the more the policy costs. A one year term policy will cost less than a 5 year term policy. A 15 year term policy will cost less per year than a 20 year policy, that is if the death benefit remains level for the duration.

Because whole life insurance lasts to age 100, and because the life insurance company is at risk for a very long period of time, whole life insurance cost more per year than term insurance.

The life insurance companies have taken the cost of whole life policies into consideration and have created a cash value to compensate for the hefty cost. The cash value built into a whole life policy offsets the difference in premium.

The carrier charges a hefty premium from the outset as they expect to be at risk for a very long time. Let us say 5 years go by and you didn't die. The company returns a part of the premium to you in the form of a cash value. This cash value is guaranteed to you from the outset, that is if you don't die in the interim. A limited amount of interest on the cash value is also guaranteed.

Here is where it gets great. If you live long enough most good whole life policies will accumulate sufficient cash value which when added to an annual dividend which is also paid by efficiently run companies to equal the premium paid.

Dividends are not guaranteed but the better performing carriers have sufficient dividends which when added to the guaranteed cash value in 20 or 25 years there is a possibility that the total exceeds the total premium paid. The cash values plus dividends of few high performance companies break even with the premiums paid at a much earlier date.

If you are in good health and you like the idea of getting something back if you don't die in a specific period maybe you should consider whole of life insurance.

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