Traditional whole life products

What makes a policy "traditional whole life"

Whole life is permanent insurance: it covers the insured for their entire life, not for a set term. Traditional whole life is built on the insurer's long-term estimates of expense, interest and mortality, and the premiums, death benefit and cash values are all stated in the policy at issue.

Three features define the classic contract:

• Level premium. The premium is fixed at issue and does not rise as the insured ages. Early premiums are more than the pure cost of protection; the excess funds the reserve.
• Level, guaranteed death benefit. The face amount stays the same for life.
• Guaranteed cash value. A savings element builds on a guaranteed schedule. It grows tax-deferred and can be borrowed against or taken on surrender. Under current mortality tables the cash value is designed to equal the face amount at the policy's maturity age, typically age 121 (age 100 on older policies), when the policy endows.

Because the cash value belongs to the policyowner, state nonforfeiture law guarantees that it is not lost if premiums stop: the owner may take the cash surrender value, reduced paid-up insurance, or extended term insurance.

The basic variations

Straight (ordinary or continuous-premium) life. Premiums are paid for the whole of life, or to the maturity age. It has the lowest annual premium of the whole life plans.

Limited payment whole life. Lifetime protection, but premiums are paid only for a limited number of years (for example, 20-pay life) or to a set age (life paid-up at 65). Because premiums are paid over a shorter span, each premium is higher than for straight life, and cash value builds faster. The policy is paid up, not matured, when payments end; coverage still runs for life.

Single premium whole life. The extreme form of limited pay: one large premium makes the policy fully paid up. It builds immediate cash value, often carries substantial surrender charges in the early years, and should be viewed as an investment-oriented product. Its cash build-up is tax-deferred, but tax is due on the gain at surrender. A single premium policy usually fails the federal seven-pay test and becomes a modified endowment contract (MEC), so loans and withdrawals are taxed as gain first.

Modified whole life. A lower premium for the first few years (often three to five), then a premium higher than regular whole life for the rest of the policy. It suits buyers who cannot afford the full premium now but expect their income to grow. A graded premium plan is similar but steps the premium up gradually each year for several years before it levels off.

Indeterminate premium whole life. Like non-participating whole life, but the company charges a current premium based on its current estimates and may adjust it, never above the maximum guaranteed premium stated in the policy.

Participating versus non-participating

• A non-participating policy gives a level premium and face amount for life at fixed cost and generally lower out-of-pocket premiums, but pays no dividends.
• A participating policy pays dividends, which reflect the company's favorable experience: excess investment earnings, favorable mortality and expense savings. Dividends are not guaranteed. They can be taken in cash, used to reduce premiums, left to accumulate at interest, or used to buy paid-up additions. Many insurers also let dividends buy one-year term insurance.

An economatic (enhanced) whole life policy combines a base of participating whole life with supplemental coverage funded by dividends, usually decreasing term plus paid-up additions. If dividends fall short, the supplemental coverage can drop substantially.

Exam tip: "level premium for life, guaranteed cash value, endows at maturity" is straight whole life. "Higher premium, shorter payment period, same lifetime coverage" is limited pay. "Low now, higher later" is modified.