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The Affluent Insurance Advisor

Whole Life Insurance

Whole life insurance was developed as an alternative to term insurance, and the first policies were designed to provide life insurance protection over the insured's entire life with guaranteed level premiums that would never increase.

One of the challenges with term life insurance was that it offered coverage for only a limited period of time. In addition, as the insured grew older and the probability of death increased, the cost of renewing term coverage increased as well, and eventually became prohibitively expensive.

The most common type of whole life insurance offers level annual premiums payable to a specified age, typically age 100. In the early policy years, the whole life premiums are greater than what a comparable term life insurance policy would cost. But as the insured ages, and the probability of death increases, the whole life policy premiums remain constant.

In effect, the whole life policy is "pre-funding" the increasing cost of coverage at the older ages by paying a higher guaranteed level premium from the outset. As a result, the whole life policy builds guaranteed cash value.

The annual increases in the cash value reduce the actual net amount of insurance coverage (face amount less the cash value) over the life of the policy. This continues until the cash value equals the policy face amount at a target age, usually age 100 or beyond. In other words, the policy owner is accumulating cash value that represents an increasing portion of the policy face amount as the insured ages.


  • Insurance for your lifetime
    Life insurance is the cornerstone of any sound financial plan. When you buy life insurance, you help to protect your family's financial security, since the money your beneficiaries receive in the event of your death can not only replace lost income, but also can help to pay their expenses at an extremely difficult time. Life insurance can also help to protect a business, by providing cash that will help to ensure the continuity of the firm's day to day operations- and often, the business itself- through the policy's death benefit.
  • Living and Death Benefits
    Whole life insurance is primarily purchased for the death benefit protection. The cash payment that is made due to the death of the insured offers unique protection for a family or business. Whole life insurance provides a death benefit that is guaranteed as long as the premiums are paid when due.

    Along with the benefit paid at death, whole life also offers tax-deferred cash value accumulation -- sometimes referred to as a "living benefit" -- that can help provide financial security while the insured is still alive. Whole life policy cash values can be withdrawn or borrowed from the policy for any purpose- supplemental retirement income, education funding or even a means of ready cash for emergencies. While withdrawals or loans that have not been repaid will reduce the death benefit, access to your whole life policy's cash value offers comfort for you while you are living- and security for your family or business after your death.
  • Life Insurance Tax Advantages
    Life insurance proceeds (the death benefit), when paid, are generally free of income taxes. In addition, if properly arranged, life insurance proceeds may not be included in an insured's estate for estate tax purposes. Policy cash values accumulate tax-deferred and you have access to those policy values on a tax-favored basis, by partial surrenders or through policy loans.


Pricing is the process used to determine premiums, cash value and dividends. The 3 main drivers of this pricing include:

  • Mortality
  • Expenses
  • Investment results


While whole life insurance has guarantees, most of the time it is sold viewing current assumptions. These variables might be better, or worse, than the actual performance over time. That is why it is vitally important to perform audits of these policies over the years to make sure the policy is staying on track to meet its goals and objectives. For example, should dividend rates go down, that might imply that the number of premiums necessary to sustain the policy over your lifetime has increased. Conversely, should dividend rates rise dramatically, that could mean that the original number of premiums predicted to be needed to sustain the policy might have decreased.

In any event one thing can be sure, that the illustration you view at point of purchase will not be the actual performance of that policy over time. That is neither pro nor a con- just the reality of financial instruments.