Whole, or ordinary, life insurance is a form of life insurance that provides lifetime protection as long as the insured pays the premium. While there are some minor variations of this basic concept - such as single premium policies in which the entire premium is paid at the outset or policies under which the insured pays premiums for a stated period of years or until the insured reaches a certain age - most ordinary or whole life policies provide for payment of level premiums for the life of the insured and of the policy.
Premiums may be payable on an annual, semiannual, quarterly, or monthly basis. Many policyholders elect monthly payments due to the magnitude of whole life premiums - it makes budgeting easier. In order to accommodate budgeting, many insurers will set up automatic debits from their checking account so that they do not have to incur the inconvenience of writing and mailing a check each month.
Whole life policies have two primary components. A portion of the premium purchases the death benefit coverage throughout the insured's life. The other component of the premium goes to build up the cash value account. In the event of the insured's death, the beneficiary is paid the death benefit (i.e., the policy limit) plus the accumulated cash value. The policy generally guarantees a fixed rate of return (i.e., interest) on the funds in the cash value account. These rates are generally low and tend to be reasonably consistent with prevailing bank savings and certificate of deposit rates (although the accumulation of the cash value account is not subject to income tax, with some limited exceptions).
Under a standard whole life policy, the insured may be paid a cash dividend by the insurer depending on the insurer's financial performance. The dividend can be used by the insured to reduce or offset premiums due, to purchase higher limits of insurance, or to purchase term insurance.
The cash value development is one of the reasons many persons purchase whole life policies. The cash value account can be borrowed against without the necessity of qualifying for a law as would be the case with a bank or other lending institutions. In addition, should the insured choose to surrender the policy, the cash value account, plus accumulated interest, is paid to the insured. Sometimes retired persons who no longer have a need for the death benefit (for example, their mortgage is paid off and their children are done with college) will surrender a life policy and use the cash value account to purchase an annuity that provides an income stream.
The provisions governing loans from the cash value account of a whole life policy are part of the policy's terms and conditions. It is the forced savings aspects of whole life policies and the cash value accumulation that make them attractive to many persons. If there is an automatic monthly debit from your checking account or you are writing a check every month to keep the policy in force, it is harder to spend that money on something else. Notwithstanding the advice of some financial advisors to buy term insurance and invest the difference, not everyone is disciplined enough to do so.
The rates of return on the cash value accounts of whole life policies are generally lower than other potential investment vehicles. However, the cash value accounts of whole life policies are usually guaranteed and most states have life and health insurance guaranty funds, which provide some protection in the event of an insurer insolvency.
Few other investment vehicles have such guaranties or safeguards. For example, while ordinary bank, savings and loan accounts, and certificates of deposit are insured by the FDIC, the limits of coverage are low. By contrast, the California life and health guarantee fund statutes provide the following recoverable limits in the event of a life insurer insolvency:
A point frequently overlooked by those who advocate buy term and invest the difference is the basic investment strategy of diversification. Yes, a whole life policy can be regarded as a low yield investment. It is, however, more secure than many alternatives. Most investment advisors would be hard-pressed to disagree with the proposition that a person's investments and savings need to be distributed among investment vehicles with higher, lower, and intermediate levels of risk. Viewed in this light, whole life coverage is something worthy of consideration - not as a person's sole investment, but as a component.
Our website is not responsible for the information contained by this article. Webworldarticles.com is a free articles resource thus practically any visitor can submit an article. However if you notice any copyrighted material, please contact us and we will remove the article(s) in discussion right away.
This article was sent to us by:
Caledon Pierce at
10072010
1. Contractual liability and owned property exclusions apply to liability coverage
All articles in this directory are property of their respective authors. Additionally, read our Privacy Policy
© 2010 WebWorldarticles.com - All Rights Reserved. Partners: Gunblade Saga