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Whole Life Insurance

(If you’re looking for a primer on available types of life insurance, please see our article on Types of Life Insurance)

Whole life insurance is part of the family of permanent insurance products. That means that generally premiums are level for life, unlike term insurance premiums that increase over time.

Whole life insurance premiums in the early years of the policy exceed the insurance costs of the company. Later in life whole life premiums, because they typically remain level, will actually be lower than the insurance costs of the company on an annual basis. What you are effectively doing is overpaying the true annual insurance cost in the early years of the policy. This overfunding is then saved up or reserved inside the policy. Later when costs exceed what you’re paying in premiums, there’s money from the early years to make up that cost differential. Pay more now to pay less later.

Now, if you cancel the policy after a period of time, the companies will typically refund you a portion of that overpayment in premium. This is known as a cash value or cash surrender value. It’s important to note that most of that cash value will be a refund of overpayment in premium, not some sort of investment.

In past years, many insurance companies were mutual. Mutual companies typically declared a non-guaranteed dividend to participating policy owners. These dividends were then used to automatically create various other options including small units of paid up insurance, or increasing cash value, or one of 2 or 3 other options. Dividends were projected as being used to pay up premiums in later years. In the 1980’s and later, dividends being paid out did not meet earlier projections and as a result many policy owners had policies they had assumed would have premiums that became paid up but in reality did not. Consumers then launched various ‘vanishing premium’ lawsuits agains insurance companies and were succesful with these suits.

Today whole life insurance is still available (you can get a quote using the online rate calculator on the top of this page) however there are permanent insurance products available today that provide better guarantees at a lower cost. Term to 100 and Universal Life are two such options.