Read about the difference between Ordinary and Limited-payment life as well as uses for Whole Life insurance. Show
What is Whole Life insurance?Whole Life Insurance, sometimes called permanent insurance, or ordinary life, is designed to stay in force throughout one's lifetime. As long as the policy owner meets his or her obligations under the policy, the policy remains in force, regardless of any changes in health that may occur. Premiums for most whole life policies remain level. A portion of each premium payment is set aside to earn interest. Over time, a whole life policy will develop cash values. The accumulated cash values form a reserve which enable the insurer to pay a policy's full death benefit, while keeping premiums level. During life, many whole life policies have provisions to borrow a portion of the accumulated cash value. If a policy is terminated without the insured dying, there are various surrender options for the cash value available to a policy owner. Policy variationsThere are two primary types of whole life insurance, based on the period over which the premium payments are made: Ordinary life: An ordinary life policy assumes that premiums will be paid until the insured dies. Premiums are based on the assumption that the insured will die at a certain age, typically age 100. If an insured lives to this age, the policy pays the face amount of the death benefit. Limited-payment life: This type of whole life policy assumes that all premium payments are made over a specified, limited period, typically ranging from one to 30 years. Premiums for a limited-payment life policy are generally higher than for an ordinary life policy, because the payment period is shorter. Common uses of Whole Life insuranceWhole life policies are well suited for needs that do not diminish over time. Some commonly found uses for whole life are:
Modified endowment contracts (MECs)A life insurance policy issued on or after June 21, 19881 If a policy is classified as a MEC, all withdrawals (including loans) will be taxed as current income, until all of the policy earnings have been taxed. There is an additional 10% penalty tax if the owner is under age 59½ at the time of withdrawal, unless the payments are due to disability or are annuity type payments. A whole life policy can avoid treatment as a MEC through a well-designed premium payment schedule. Additional policy elementsWhole life policies often have additional, useful features:
Policy dividends used to purchase paid-up additionsAlthough policy dividends are not guaranteed, using available dividends to purchase paid-up additions can, over time, have a significant, positive impact on both the death benefit and cash value of a whole life policy. The diagram illustrates how this might work, in a hypothetical life insurance policy. Optional policy provisionsA number of optional provisions, commonly referred to as riders, can be added to a basic whole life policy, generally through payment of an additional premium:
If you are interested in a quote on this type of life product, please contact a State Farm Agent. 1 Including a policy issued before that date, but later materially changed. What is dividend accumulation option?What Is an Accumulation Option? An accumulation option is a policy feature of permanent life insurance that reinvests dividends back into the policy, where it can earn interest. Some types of insurance pay dividends to their policyholders each year when the insurance company performs better than estimated.
Which of these Nonforfeiture options continue a buildup of cash value?Which nonforfeiture options continue to build up cash value? If a policy owner elects the reduced paid-up nonforfeiture option, the cash value from their original policy will be used to purchase a single premium whole life policy. Whole life insurance is permanent and accumulates cash value.
How does cash value accumulation in a life insurance policy?Cash value builds up in your permanent life insurance policy when your premiums are split up into three pools: one portion for the death benefit, one portion for the insurer's costs and profits, and one for the cash value.
Which dividend option allows a policyowner to use his her dividends?The paid-up additions option allows the policyowner to use the dividend as a single premium to purchase an additional amount of whole life coverage. He may apply the dividends to overdue premiums from past years.
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