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What is a whole life insurance policy?

A whole life policy does what it says, i.e. to offer coverage during the whole of the policyholder's life. So, whenever the insured dies, the face value of the policy (usually called the "death benefits") is paid out to the family member or relatives named in the policy. If no one is named, the insurance company pays out to whoever is administering the deceased's estate for distribution under the terms of any will or on intestacy.

There are two major differences between whole life and term life policies:

  • term life policies only pay out if the insured dies within the term of years; and
  • a whole life policy has a cash value which grows over time.

In the standard policy, the expected cost of the death benefits is spread out in fixed, equal instalments over the expected life time of the insured. This has the advantage that, with the effect of inflation, the real value of the premium falls over time. Thus, when people are older and perhaps facing life on a pension, the premium will still be affordable. As the premium money accumulates and is invested by the insurance company, the policy acquires a cash value. Indeed, some whole life policies pay an annual dividend. This amount is either a part of the return on money invested or a partial refund of premiums where enough has already been paid to cover the guaranteed element of the death benefits. This dividend may be added to the value of the policy or can, in later years, be withdrawn to supplement a pension.

During the life of the insured, the cash value can be accessed in two ways:

  • a policyholder is allowed to surrender the policy in return for the cash value - the insurance company is no longer at risk and returns the premiums paid less commissions and fees, and plus the investment income; and
  • after the policy has been in force for a given number of years, the policyholder is allowed to borrow some of the cash value. As with any loan, interest is payable and the capital has to be paid back. Should the policyholder die before the loan is repaid, the amount outstanding is deducted from the death benefits. But this is not a commercial loan requiring approval from the lender based on the current credit score and other factors. In effect, policyholders are borrowing their own money so approval by the insurance company is usually a formality.

Whole life, sometimes also called "ordinary life", policies are the most common type of life insurance because they both pay out on death and represent a safe way in which people can save money, i.e. build up the cash value. But, just because a policy is common, does not mean that all policies are the same good value. Everyone looking for a policy should use the search engine on this site to shop around and find the insurance company offering comprehensive coverage at an affordable premium.


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