Whole Life

Whole life insurance is the oldest form of permanent insurance

  • usually pays a policy dividend if there are gains from
    • interest (actual returns vs expected returns)
    • mortality (actual deaths vs expected deaths)
    • expenses (actual expenses vs expected expenses)
  • death benefit is the larger of the Face Amount and the Cash Surrender Value
  • options include
    • Automatic Premium Loan
    • Extended Term Insurance
    • Reduced Paid-Up
    • Cash Surrender Value
  • premiums are paid for life or a limited period (e.g., for 20 years or to age 65)
  • premiums are higher than required to cover the insurance charges
    • savings grow tax-deferred, which gives money to cover charges in later years


  • simplicity: investment decisions are made by the insurer, which passive investors like
  • forced savings: good if you lack the discipline to save


  • limited flexibility
  • mechanics of policy are hidden
    • amount of insurance charges
    • investment growth
  • lack of investment choices
  • policy dividends set at the discretion of the insurer
  • risks transferred to you:
    • higher mortality claims can reduce dividends
    • lower investment returns can reduce dividends
    • higher expenses can reduce dividends

Client Profile

You may find whole life useful for

  • estate planning
  • creditor protection
  • tax deferred savings
    • can use as collateral for loans
  • passive investing

Cash Surrender Value

Surrendering an insurance contract is a disposition and any gain is taxable.

Nonforfeiture Options

Rather than surrendering your policy contract, you can use the Cash Surrender Value in three ways

  1. an automatic premium loan (APL)
  2. extended term insurance (ETI)
  3. reduced paidup insurance (RPU)

There are no tax implications as use of a nonforfeiture option is not considered a disposition.

Automatic Premium Loan (APL)

  • takes a policy loan from the Cash Surrender Value for any shortfall in premium

Extended Term Insurance (ETI)

  • use the Cash Surrender Value as a single premium to buy term insurance for the current face amount
    • term rates are based on the attained age of the life insured
  • any riders and benefits are cancelled

Are any dividends payable when a policy is on ETI (none with RPU)?

Reduced Paidup Insurance (RPU)

  • use the Cash Surrender Value as a single premium to buy a smaller amount of permanent life insurance
    • cost based on the attained age of the life insured
  • any riders and benefits are cancelled
  • no more policy dividends
  • policy still has Cash Surrender Value

Adjustable Premium Whole Life

also called Interest Sensitive Whole Life

  • premium and death benefit guaranteed for a period (e.g., 5 years), then adjusted based on current investment returns
  • if investment yield improved during period
    • death benefit increases for the same premium or the premium drops for the same death benefit
    • most appealing here
  • if investment yield drops during period
    • death benefit decreases for the same premium or the premium increases for the same death benefit

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