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
Advantages
- simplicity: investment decisions are made by the insurer, which passive investors like
- forced savings: good if you lack the discipline to save
Disadvantages
- 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
- an automatic premium loan (APL)
- extended term insurance (ETI)
- 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
page revision: 16, last edited: 08 Jul 2007 14:44