What is Whole Life Insurance? - Definition & Types

Instructor: Brianna Whiting
Being financially prepared at death gives your family one less thing to deal with. That is the main purpose of life insurance. In this lesson, you'll learn about the different types of whole life insurance.

Whole Life Insurance

It is always a terrible thing when a loved one dies. But having to deal with the financial aspects can add even more stress to an already trying time. That is why so many people invest in life insurance so that their loved ones will be able to pay for any funeral arrangements and be able to put some money in the bank to help with any other financial needs in the future. Whole life insurance accumulates a cash value throughout the life of the policy holder and pays money to a beneficiary when the policy holder dies. In this lesson, you'll learn about the different options of whole life insurance so that you will be more knowledgeable about what may work best for you.

Single-Premium and Limited Payment

Single-premium life insurance is a policy in which a lump sum of cash is paid into the policy and then builds interest with a fixed rate. When the insured individual dies, the money is paid out to the beneficiary. This payout is known as a death benefit. The age and the health of the insured influences the amount of the death benefit. So, an individual that is 80 in poor health who takes out a single premium policy would have less interest accumulated at the time of the death benefit then a 25 year old in great health who takes out the same policy. However, keep in mind that while the fixed rate ensures the policy will continue to grow steadily, the single-premium policy may cause you to miss out on any huge financial gains should the markets perform well.

Another type of whole life insurance is limited payment. Limited payment life insurance is a policy that is paid for a limited amount of years, such as 10, 15, or 20 years, but the benefits last for a lifetime. This simply means that an annual premium is paid for an agreed amount of years instead of for the insured's entire life. For example, if the insured wants the policy paid in full by 70, then she will pay accordingly so that it is paid by 70. While the insured no longer has to make payments after 70, the policy will continue as long as the insured is still alive.

Variable Universal

Variable universal life insurance is a policy that pays out a death benefit and offers an investment feature. This means there is a savings portion and a death benefit portion. The insured will pay a premium into the savings portion, which is usually separated into sub-accounts like stocks and bonds. While those separate accounts can accumulate money by means of investments, it is also possible that the separate accounts may get negative returns, which reduces the cash value. When this happens, the insured may have to pay extra premiums.

Interest Sensitive

Interest sensitive life insurance is a a type of life insurance that offers coverage for life and has income tax-deferred accumulation value. It has a fixed premium, and the amount of interest on the policy is determined by the current market. It can be used to pay off mortgages in the event of a death, or it can be used to make a charity donation. The insured can add to the cash value significantly if the market is performing well.

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