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Whole Life Insurance Explained

Whole Life Insurance Is Very Flexible

When you think of life insurance the whole life insurance policy is the first type of insurance that comes to mind. It can be considered a staple in the life insurance industry and has been so ever since the concept of life insurance was thought up. The whole life insurance policy is the do all of life insurance. It builds true value and provides benefits that most insurance buyers have not even thought of.


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Death Benefit

The whole life policy provides a level guaranteed death benefit which is usually free of Federal Income Taxes. If, however, it is part of your estate it is subject to Federal Taxes. Talk to your accountant or attorney to confirm this. Your death benefit can never be canceled as long as you continue to pay the required premiums.

Premiums

Premiums are guaranteed to remain level. They never increase, except in the case of a modified whole life insurance policy which starts out with a premium that is lower than the actual premium should be.

Cash Values

Whole life insurance policies earn cash values which accumulate tax-deferred. Policy owners can take tax free loans from the cash values of their policies.

Dividends

If these policies are participating life insurance policies they are eligible to earn dividends. Dividends can be used in varying ways.

  • Paid Up Additions Dividends can be used to purchase paid up additions. Each year your dividend can be used to purchase an additional single premium whole life policy which would added to your original policy. This is the option usually used by most life insurance companies if the policy owner does not otherwise elect. Dividends are not guaranteed.
  • Cash Each year your dividend can be paid to you in cash. If this dividend option is elected, each year on the following anniversary, a check will be mailed to the policy owner in the amount of the dividend.
  • Premium Reduction Dividends can be used to reduce premiums. The insurance company will advise you that your premium for that year is less than the premium contracted for. It has been reduced by the dividend. After your whole life policy has been in force for a long time dividends have been known, not only to reduce premiums for that given year, but in some cases to totally eliminate the premium.
  • Dividend Accumulation Dividends can be left to accumulate interest. This is a very good option to use as you can apply the cash to so many things. You can use it to fund college education for children, or may be to pay off the balance of an outstanding mortgage.

Modified Whole Life

  • The whole life insurance policy is so flexible that many policies have been derived from it; some of them are quite commonplace today. The policy that is usually referred to as a modified life policy is one for which you would pay a lower premium for about 5 years or so. This was, I believe, especially designed for young people, may be in college, who do not have much free cash, therefore limiting the amount available to pay a life insurance premium. When they graduate, and are gainfully employed, they will have more spendable income and will be able to pay the regular premium.
  • Another modification of the whole life policy is the limited payment policy . The policy owner buys a policy for which he only pays a premium for a certain number of years. The 10 pay life is a good example. With this policy the premium payer only pays premiums for 10 years. The face amount of the policy remains level for the entire life of the policy. The policy earns cash values and accumulates dividends just like any permanent life insurance policy.
  • Another modification of the whole life policy is the single premium life insurance policy You pay one premium for this policy and never pay another premium for as long as you live. The death benefit remains level throughout. You have cash values and earn dividends like any other whole life policy. Some people like to take care of their important needs and not think about them for a while. This policy would serve that person well.

There are many other variations or modifications to the whole life insurance policy which will not be discussed here as they vary from company to company.

Riders

There are several riders that you can add to your whole life insurance policy that would enhance your benefits.

  • Waiver Of Premium One of the most commonly used riders to the whole life insurance policy is the waiver of premium disability rider. If you should become permanently disabled, while you own this policy, the life insurance company will pay your premiums for you. With most companies you must be disabled for a minimum of six months for the waiver of premium to take effect.
  • Accidental Death Benefit The accidental death benefit rider, otherwise known as the double indemnity rider, affords the policy owner double the death benefit upon his or her death in an accident. If, for example, you are insured for $1,000,000, you selected the accidental death benefit rider, and you should die in an automobile accident, your beneficiaries would receive $2,000,000 from the insurance company.
  • Term Life Insurance Some life insurance companies allow you to add term insurance riders to your whole life insurance policy. Let us say you like the cash value feature of the whole life policy but you need additional death benefit to protect your family you may add a 5 or 10 year term rider or an increasing premium rider to meet that need. When you can put your hands on more cash, or have more spendable income, you can convert the term insurance rider to whole life insurance.
  • Living Benefit Rider If you should become terminally ill and are in need of immediate cash it would be good that you had a living benefit rider on your policy. The insurance company would pay to you a portion of your death benefit before you die.
  • Spouse & Child Riders You could buy term life insurance for your spouse and children separate from your own life insurance policy. Some life insurance companies allow you to add these policies as riders to your whole life policy at a reduced cost.
  • Future Policy Purchase Option As you get older you may find it more difficult to get new life insurance because of the state of your health. Some insurance companies can add a rider to your whole life insurance policy which would allow you to purchase additional insurance in the future regardless of the state of your health.

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