Whole Life Insurance

Whole life insurance provides coverage for the lifetime of the person insured. The most common whole life policy is a straight life policy, also called a continuous premium policy. The premiums are payable as long as the insured person lives.

A limited payment policy also gives lifetime protection. However, it provides for completing the payments within a limited period, usually 20 or 30 years, or at a certain age, such as 65. The premiums are higher than for straight life because they are paid for fewer years.

Unlike most term life insurance premiums, whole life premiums do not increase with the age of the person insured. Whole life insurance costs more than term insurance, however. Policyholders of whole life insurance actually pay more than the amount needed to cover the statistical risk of death at their age. This excess amount, plus the interest paid on it by the insurance company, accumulates and forms the policy's cash value. The cash value increases with the age of the policy. When the insured person dies, however, the beneficiary receives only the face value, regardless of the cash value.

Many whole life policyholders borrow against the cash value or surrender their policies for the cash value to supplement their retirement income or to meet major expenses. A policyholder who surrenders a whole life policy can take advantage of nonforfeiture options in the policy to buy another policy.

The policyholder can use all or part of the cash value to purchase extended term insurance or paid-up insurance. Extended term provides coverage equal to the face value of the original policy but for a limited period. Paid-up insurance provides lifetime coverage but at a lower face value.