Characteristics of Whole Life
Whole life insurance is the oldest and most traditional form of permanent life insurance. It provides lifelong protection with guaranteed premiums, death benefits, and cash value accumulation.
What Is Whole Life Insurance?
Whole life insurance (also called ordinary life or straight life) provides permanent protection for the insured's entire lifetime. As long as premiums are paid, the policy remains in force and the death benefit is guaranteed.
Think of whole life like owning a home—you pay more than renting (term), but you build equity (cash value) over time.
Four Defining Characteristics
1. Permanent Protection
Whole life provides coverage for your entire lifetime—not just a specified term.
| Feature | Term Life | Whole Life |
|---|---|---|
| Coverage period | 10, 20, 30 years | Entire lifetime |
| Expires | At end of term | At death or age 100/121 |
| Renewal required | Yes (at higher rates) | No |
The policy "endows" (pays the face amount) at maturity—typically age 100 or 121 under current mortality tables.
2. Level Premiums
Whole life premiums are level—they remain the same throughout the life of the policy.
How level premiums work:
- In early years, you pay more than the actual cost of insurance
- The excess builds cash value
- In later years, the cash value helps offset the higher mortality cost
- Premium never increases regardless of age or health changes
Exam Tip: Whole life premiums are "averaged out" over the insured's lifetime. Young policyholders overpay relative to mortality risk; older policyholders underpay.
3. Cash Value Accumulation
A portion of each premium payment goes into a cash value account that grows over time.
| Cash Value Feature | Description |
|---|---|
| Tax-deferred growth | Not taxed until withdrawn |
| Guaranteed minimum | Policy guarantees a minimum growth rate |
| Accessible | Can be borrowed against or surrendered |
| Part of death benefit | At death, beneficiary receives face amount (cash value is included) |
4. Guaranteed Death Benefit
The death benefit in a whole life policy is guaranteed—it will not decrease as long as premiums are paid.
What's guaranteed:
- The face amount (death benefit)
- The premium amount
- The minimum cash value accumulation
How Whole Life Works
The Premium Allocation
When you pay a whole life premium, it's divided into three parts:
| Component | Purpose |
|---|---|
| Mortality charge | Covers the cost of death benefit protection |
| Expense charge | Covers insurer's operating costs |
| Cash value | Savings component that accumulates |
The Cash Value Growth Pattern
Cash value grows slowly in the early years and accelerates later:
| Policy Year | Approximate Cash Value (Example) |
|---|---|
| Year 1 | Minimal or none |
| Year 5 | $2,000 |
| Year 10 | $8,000 |
| Year 20 | $25,000 |
| Year 30 | $50,000 |
| At maturity (age 100) | Equals face amount |
Key Point: Cash value grows slowly at first because early premiums cover acquisition costs (commissions, underwriting). The cash value "equals" the face amount at maturity.
Advantages of Whole Life
| Advantage | Explanation |
|---|---|
| Lifetime coverage | Never expires; guaranteed death benefit |
| Level premiums | Never increase; predictable cost |
| Cash value | Builds savings; accessible during lifetime |
| Tax benefits | Cash value grows tax-deferred |
| Guaranteed elements | Premium, death benefit, and minimum cash value are guaranteed |
| Dividend potential | Participating policies may pay dividends |
Disadvantages of Whole Life
| Disadvantage | Explanation |
|---|---|
| Higher premiums | Costs 5-15 times more than term for same death benefit |
| Lower flexibility | Cannot adjust premiums or death benefit |
| Slow cash growth | Takes years for significant cash value to build |
| Complexity | More difficult to understand than term |
| Opportunity cost | "Buy term, invest the difference" argument |
Whole Life vs. Term Life
| Factor | Whole Life | Term Life |
|---|---|---|
| Premiums | Higher, level | Lower initially, may increase |
| Coverage | Permanent | Temporary |
| Cash value | Yes | No |
| Best for | Permanent needs | Temporary needs |
| Flexibility | Less | More (convertibility) |
When Is Whole Life Appropriate?
Whole life is suitable when:
- Coverage is needed for the insured's entire lifetime
- A guaranteed death benefit is important
- Cash value accumulation is desired
- Premium predictability is valued
- Estate planning or wealth transfer is a goal
- The client can afford higher premiums
Key Takeaways
- Whole life provides permanent, lifetime protection
- Premiums are level and never increase
- Cash value accumulates tax-deferred and can be accessed
- The death benefit is guaranteed as long as premiums are paid
- Whole life costs more than term but provides permanent protection
- Cash value grows slowly at first and accelerates over time
- At maturity (typically age 100-121), cash value equals the face amount
Which of the following is a characteristic of whole life insurance?
In a whole life policy, premiums are designed to:
At maturity (typically age 100-121), a whole life policy's cash value will:
6.2 Types of Whole Life Policies
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