Whole Life Policy

From Financial Literacy Wiki

Whole life policy provide lifelong insurance protection. The insurance company pays a lump sum on the death or permanent & total disability of the insured whenever it occurs. Whole life policy can either be participating or non-participating. Premiums would be higher for participating policy as there are benefits like bonuses in addition to the basic sum assured.

Premiums for whole life policy are paid at regular intervals and are normally payable up to a certain age and the insured still remains covered for life.

Unlike term policy, whole life policy acquire a cash surrender value after the policy has been in force for some time. This cash surrender value refers to whatever s left of the premiums paid after the insurer has deducted agent's commission, administrative charge, mortality costs and profits for the company. Usually in the first two or three years of a policy, there is no surrender value. This is because the premiums paid is not sufficient to cover the costs mentioned. As times goes by, premiums are the same but charges like commission would decrease, thus building up cash savings. Once there are cash surrender value in the policy, the policy holder can:

• Remain covered by the policy, thus resulting in a built-up of cash surrender value at a rate of return determined by the insurance company.
• Terminate the policy and take the surrender value.
• Surrender the policy and exchange the cash surrender value for a policy with reduced sum assured. This option allows the insured to still be covered without paying premiums.
• Surrender the policy and exchange the cash surrender value for an annuity. This allow the insured to support a retirement plan.
• Use the cash surrender value as a collateral for a policy loan from the insurance company. There will be interest charge on the loan.