Whole life insurance simply means that the insurance remains in force for the entire life of the insured person. There are two types of this policy: non-participating and participating. In a non-participating policy, all values related to the policy are decided at the time of issue. These values cannot be altered once the policy is finally bought. In this case, the company takes into consideration all the risks involved. If the estimates are high when values are being decided and if they do not total to the same value at the time of maturity, the beneficiary gets the excess amount. But, if while deciding the value the stakes are low, and are increased at the time of maturity, the amount is retained by the company.
In a participating policy, the excess charges are shared with beneficiaries since these amounts are not taxable. These excess charges are considered as overpayment of the premium. Typically, participating policies are issued by mutual life companies. On an average, the premium for participating policies will higher compared to the non-participating ones. In case of mutual companies, the over charged amount is paid to policy holders in the form of dividends.
Whole life insurance usually requires the owner to pay the premium for the entire period. There are arrangements that provide a policy pay up, in which case no further payments are required. Typically, if no large sum is paid at the outset of the insurance life, the payor isn’t allowed to pay it later at any point. Universal life insurance, however, provides better flexibility in premium payment.
Usually, the company guarantees increased cash value irrespective of the death claims or the company’s performance. There are three ways in which the dividends can be taken. A cheque can be drawn by the company in favor of the client, the dividends can be used to reduce the premium payments, or can be invested back in the policy to increase the death benefit. When the client chooses to reinvest the dividend, there are chances of the cash value increasing, depending on the performance of the company. The owner can surrender the policy at any given time for the cash value amount, and the taxes will be inferred only once according to the gains of the cash value that exceeds the total premium outlay.
If the policy owner is financially sound enough to make regular premium payments, then the cash values are considered liquid enough to be used as investment capital. Till the premium is paid, the cash values is tax free. The rest may be accessed in the form of policy loans. If the insured person dies, death benefit is reduced in consideration to the total amount due on the policy loan. Thus, many people chose to buy whole life insurance policies as a retirement funding solution rather than for risk management.
