Types of Whole Life Policies
While "ordinary" whole life is the standard form, several variations exist to meet different needs and budgets. Each type modifies the premium payment structure while maintaining the core whole life features.
Ordinary (Straight) Whole Life
Ordinary whole life (also called straight life or continuous premium whole life) is the traditional form where level premiums are paid for the insured's entire lifetime.
Features
| Feature | Ordinary Whole Life |
|---|---|
| Premium payment period | Until death or maturity (age 100-121) |
| Premium amount | Level throughout |
| Cash value growth | Slowest compared to limited pay |
| Premium cost | Lowest of whole life options |
Who It's For
- Those who want the lowest whole life premium
- People comfortable paying premiums throughout life
- Those who can commit to long-term premium payments
Limited Pay Whole Life
Limited pay whole life provides lifetime coverage but premiums are paid over a shorter period. Once premiums are paid in full, the policy is "paid-up" and remains in force for life.
Common Limited Pay Variations
| Policy Type | Premium Payment Period |
|---|---|
| 10-pay life | 10 years |
| 20-pay life | 20 years |
| Life paid-up at 65 | Until age 65 |
| Life paid-up at 60 | Until age 60 |
How Limited Pay Works
| Feature | Limited Pay | Ordinary Whole Life |
|---|---|---|
| Premium amount | Higher | Lower |
| Payment period | Shorter (limited) | Lifetime |
| Cash value growth | Faster | Slower |
| Coverage period | Lifetime | Lifetime |
Example: 20-Pay Life
A 35-year-old purchases 20-pay life insurance:
- Pays premiums for 20 years (until age 55)
- At age 55, policy is paid-up—no more premiums due
- Coverage continues for life
- Cash value continues to grow
Who It's For
- Those who want premiums paid before retirement
- Higher income earners who can afford larger payments
- Those who want faster cash value growth
- People planning for future reduced income
Single Premium Whole Life (SPWL)
Single premium whole life is paid for with one lump-sum payment at issue. The policy is immediately paid-up.
Features
| Feature | Single Premium Whole Life |
|---|---|
| Premium payments | One lump sum at issue |
| Cash value | Immediate substantial cash value |
| Death benefit | Guaranteed for life |
| Premium amount | Very large (tens of thousands) |
MEC Classification
Single premium policies are classified as Modified Endowment Contracts (MECs) under IRS rules:
- Withdrawals are taxed on a "last-in, first-out" (LIFO) basis
- 10% penalty on taxable gains if withdrawn before age 59½
- Policy loans are treated as taxable distributions
Exam Tip: Single premium life is almost always a MEC because it's funded with more than the "7-pay test" allows.
Who It's For
- Individuals with a large lump sum to invest
- Those focused on death benefit rather than cash value access
- Estate planning purposes
- Wealth transfer goals
Modified Whole Life
Modified whole life (also called modified premium whole life) has lower premiums in the early years that increase to a higher level later.
How It Works
| Period | Premium Level |
|---|---|
| Years 1-5 (or 1-10) | Lower premium |
| Remaining years | Higher premium (level thereafter) |
Features
- Initial premiums may be close to term insurance rates
- After the initial period, premiums increase significantly
- Once increased, premiums remain level for life
- Cash value builds slower in early years
Example
| Year | Monthly Premium |
|---|---|
| Years 1-5 | $100 |
| Years 6+ | $200 (level thereafter) |
Who It's For
- Young professionals expecting higher future income
- Those who can't afford whole life premiums today
- People who want permanent coverage but need a lower entry point
Graded Premium Whole Life
Graded premium whole life has premiums that start low and gradually increase for several years before leveling off.
How It Works
| Period | Premium Pattern |
|---|---|
| Years 1-10 | Increases each year |
| Year 11+ | Level for life |
Example Premium Schedule
| Year | Annual Premium |
|---|---|
| 1 | $500 |
| 2 | $600 |
| 3 | $700 |
| ... | Increases |
| 10 | $1,400 |
| 11+ | $1,400 (level) |
Who It's For
- Similar to modified life—those expecting income growth
- Provides an even more gradual premium increase
- Entry-level buyers who want permanent coverage
Interest-Sensitive Whole Life
Interest-sensitive whole life (also called current assumption whole life) credits cash value with a current interest rate that may be higher than the guaranteed minimum.
How It Works
| Component | Description |
|---|---|
| Guaranteed rate | Minimum interest credited to cash value |
| Current rate | Higher rate based on market conditions |
| Premium | May be reduced if current rate exceeds guaranteed rate |
Features
- Cash value earns current market rates (with a floor)
- If interest rates are high, cash value grows faster
- Some policies allow premium reductions based on performance
- Mortality and expense charges may also be based on current assumptions
Comparison
| Feature | Traditional Whole Life | Interest-Sensitive Whole Life |
|---|---|---|
| Interest rate | Guaranteed only | Guaranteed + current excess |
| Cash growth | Fixed | Variable based on rates |
| Premium flexibility | None | Some policies allow reduction |
Who It's For
- Those who want potential for higher cash value growth
- Policyholders comfortable with some variability
- Those who understand that current rates may not continue
Summary Comparison
| Type | Premium Pattern | Best For |
|---|---|---|
| Ordinary whole life | Level, lifelong | Lowest whole life premium |
| Limited pay | Higher, shorter period | Paid-up before retirement |
| Single premium | One lump sum | Lump sum wealth transfer |
| Modified | Low then higher | Young professionals |
| Graded | Gradually increases | Entry-level buyers |
| Interest-sensitive | May vary with interest | Higher cash value potential |
Key Takeaways
- Ordinary whole life has level premiums paid for life
- Limited pay policies have higher premiums for a shorter period
- Single premium is paid with one lump sum and is usually a MEC
- Modified and graded policies have lower initial premiums that increase
- Interest-sensitive policies credit cash value based on current interest rates
- Choose the type based on premium budget, payment preferences, and cash value goals
A 20-pay life insurance policy differs from ordinary whole life in that:
Single premium whole life insurance is typically classified as:
Modified whole life insurance has premiums that:
Interest-sensitive whole life differs from traditional whole life in that:
6.3 Cash Value Features
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