Whole Life Insurance Overview

Study Notes

Whole Life Insurance Overview

Provides permanent insurance coverage as long as yearly premiums are paid.
Premium amount is fixed at the policy's inception and remains level throughout the policy's life.

Premium System and Reserve Funds

Insurers use a level premium system to maintain consistent premium rates despite increasing mortality risk.
Excess premiums collected create a reserve fund, invested and accumulated by the insurer for funding future premiums.

Cash Value and Payouts

Cash value can be available early (even in the first policy year) if accumulated premiums and investment earnings exceed expenses.
Policy cash values payable upon death are reduced by any outstanding policy loans.
Policies with cash values can be surrendered for cash surrender value, ending protection.
Partial cash value access can be obtained through loans, which incur interest determined by the insurer.

Policy Maturity and Premium Considerations

Whole life policies pay out either upon premature death or at maturity, typically at age 100.
Purchasing a policy at a young age secures lower premiums and adequate life coverage.
Premiums are generally paid until 100 years of age or upon death, often waived after a stipulated age (e.g., 85).

Cash Value and Collateral Use

Cash value builds over time, usually not exceeding the sum insured until age 85 or 100.
Can be used as collateral for loans; lenders may require assignment of the policy, giving them recovery rights upon the insured's death.

Policy Types and Participation

Whole life policies can be participating (par) or non-participating (non-par).
Par policies offer dividends based on surplus from mortality, expenses, and investments, generally leading to higher cash values and premiums.
Increased popularity of participating policies attributed to higher cash values.

Payment Flexibility and Variants

Premiums can be paid annually, semi-annually, quarterly, or monthly.
Insurers offer riders and various permanent life policy variations, including ordinary whole life, limited payment whole life, whole life endowment, universal life, variable life, adjusted life, and variable universal life insurance.

Endowment Insurance

Pure endowment pays the sum insured only at maturity; if death occurs prematurely, premiums paid are returned to beneficiaries with nominal interest.
No medical examination is required for pure endowment as it lacks a protection element, making it ideal for retirement savings.
Endowment insurance combines protection (term insurance) with savings (pure endowment), providing payment at maturity, attained age, or upon premature death.
Premiums for endowment insurance remain level throughout the policy term, sharing characteristics with whole life insurance, including cash values and reserves.
Certain endowment policies offer guaranteed cash payments every 3 to 5 years, which can either be withdrawn or left to accumulate interest until policy maturity.
Higher premiums may be associated with policies that provide interim cash payments, appealing to clients who desire periodic cash flow.
Endowment policies can serve multiple financial goals, including income protection, retirement funding, education expenses, business investments, or leisure activities like cruises.

Investment-Linked Plans

Investment-linked insurance allows policyholders to accumulate wealth while providing death coverage through life insurance.
Premiums are divided into two parts: one for insurance protection and another for investment in funds.
Policyholders may choose either a single premium or periodic premiums for their investment-linked plan.
Investment funds can be managed by the insurer or external fund managers, aiming to offer both protection and wealth accumulation.
Policies consume premiums to purchase units in investment funds at their offer price; the number of units equals the investment portion divided by the unit offer price.
Investment unit prices fluctuate based on fund performance and market conditions, with potential depreciation during poor economic times and appreciation in a booming economy.
Policyholders bear the investment risks and reap benefits based on the performance of financial instruments associated with their policy.
Insurers typically offer multiple investment fund options, such as balanced and income funds, allowing policyholders to choose based on risk tolerance.
Flexibility is a feature of investment-linked plans, permitting policyholders to switch units between funds without fees for initial switches, though later switches may incur charges.

Description

This quiz covers the fundamental aspects of whole life insurance, including its permanent nature, level premiums, and the significance of early payment. Learn how this insurance product serves to provide lifelong coverage as long as premiums are maintained. Test your understanding of how whole life insurance functions and its pricing mechanisms.