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Whole Life Insurance

Whole life provides a death benefit and an accumulating cash value. By definition, it has a fixed premium and a level death benefit to age 100. The premiums don't increase with age, which averages the cost of the policy over your life. The cash value increases with time until it equals the death benefit at age 100. Whole life is also known as Ordinary (or Permanent) life insurance. This type of policy never has to be renewed or converted. The cash value is an amount of money that you are guaranteed to receive in the event of policy cancellation. You also have the right to borrow against the cash value on a loan basis.

There are several variations of Whole life.

The most common are Modified Premium and Graded Premium. These policies are used when whole life protection is needed, but can't be afforded. Modified Premium policies typically have a lower fixed premium for the first 3 or 5 year period, at which point premiums increase. Modified policies work well for individuals that expect to improve their financial condition. Graded Premium policies are similar, except the premium increases each year for the first 5 years, and then becomes fixed after that. Another common version of whole life is Limited-Pay. These policies are a variation that make it possible to stop premium payments at the end of a specified time period without a reduction in the death benefit. In other words, the policy becomes fully paid prior to age 100. The most common examples of this are 10 Payment Life, 20 Payment Life, or Life Paid up at 65.


Ownership and Beneficiaries

It is strongly advised that when purchasing life insurance an attorney and or a Certified Public Accountant is consulted. There are several crucial decisions that need to be made with respect to the policy details.

Although the whole life policy may be financial protection for your life, the owner of the policy doesn't need to be you. In many cases it is beneficial for your spouse, a trust, an estate or a business/corporation to own the policy. The general rule that applies is that the owner and beneficiary need to have an "insurable interest". Simply put, that person or corporation needs to have a financial interest in your living.


Dividends

Some life insurance companies pay dividends to policyholders after they have owned a policy for a specific period of time. Policies with participating stock insurance companies and mutual insurance companies sometimes pay dividends if the company is profitable and declares a dividend. Dividends are in no way and under no circumstances guaranteed and are only one factor in determining the potential value of a policy. The Internal Revenue Service has considered dividends on life insurance policies to be a return of excess premium and therefore not a taxable event (Consult your tax Advisor).


Premium Payment

Know what your grace period is and make certain that the insurance company receives your premium on time. Coverage can be canceled if premiums are not paid on time. It is possible reinstate coverage if this occurs, but if you need it badly you will most likely be denied.

Ask for all options of paying your premium (monthly, Electronic Funds Transfer, quarterly, semi, annual, and annual) in order that you may evaluate your options carefully. Discounts are generally given for EFT and annual modes of premium payment.


Typical Exclusions

Read your policy carefully. Among typical exclusions are suicide, death while in the commission of a felony and death that occurs as a result of an act of war, but a few exceptions exist.

 

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