Whole Life Insurance

Summary

Whole life insurance (also called ordinary life) is a permanent policy with fixed annual premiums and a set death benefit. The policy accumulates cash value at a guaranteed rate. Whole life can be a good choice for individuals willing to give up flexibility and probable higher returns for predictability and security.

Variations

A common variation is modified whole life which offers a lower premium in the earlier years. The intent is that the dividends earned on the initial investment will be sufficient to offset the higher premiums after the first few years. This is a method for making whole life more affordable to younger families. Another variation is interest sensitive whole life (also called current assumption life). This type of policy has all of the features of regular whole life with the additional benefit that the cash value grows at current interest rates. In times of higher rates, this can be a significant advantage and this type of policy is more expensive as a result.

Advantages

There is no clear cut advantage or disadvantage to one type of permanent insurance over another. Each type has its appropriate use. Whole life offers more security than other types of permanent insurance but has less flexibility. Many buyers of whole life insurance are attracted by the convenience of one fixed cost product that guarantees their lifelong insurability, creates a safe and secure emergency fund, and provides liquid assets to their heirs. Buyers of universal life like the flexibility of a policy that can start out with modest premiums and benefits, increase as their family grows, provide a source for college funding, then be scaled back during the "empty nest" years.

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