Once in a while I get questions on whole life insurance and how it works. Here’s a very brief summary.
Whole life insurance (AKA Whole of Life Assurance) is an insurance policy that remains active for the entire life of the policy holder. It requires yearly premium to be kept in active standing. The difference with whole life insurance versus term insurance is the cash value it holds.
When you pay your premium, it accomplishes two things. The first portion goes towards your life insurance coverage, and the rest is set aside and accumulates into what is referred to as “cash value.” The cash value portion of your insurance policy grows at a guaranteed minimum interest rate. Once the cash value grows to a certain point, your policy can be considered “paid up.” This means the cash value has grown to a point to make your premium payments. Once this occurs, premium payments no longer have to come out of pocket and you maintain your life insurance coverage.
Whole Life Insurance Policies can also pay dividends. Just like owning stock in a company, if their returns are higher than expected, dividends are returned to the policyholders.
Premium levels also generally do not increase over your lifetime. They will remain level as you get older and even if you should develop unforeseeable medical conditions. Interest rates on your cash value returns also remain constant throughout your lifetime.