Whole Life Insurance

Planning for your future

Whole/Permanent Life Insurance

sometimes called “straight life” or “ordinary life,”  is a life insurance policy it represents a contract between the insured and insurer that as long as the contract terms are met, the insurer will pay the death benefit of the policy to the policy’s beneficiaries when the insured dies. Because whole life policies are guaranteed to remain in force as long as the required premiums are paid, the premiums are typically much higher than those of term life insurance where the premium is fixed only for a limited term. Whole life premiums are fixed, based on the age of issue, and usually do not increase with age. The insured party normally pays premiums until death, except for limited pay policies which may be paid-up in 10 years, 20 years, or at age 65. Whole life insurance belongs to the cash value category of life insurance, which also includes universal lifevariable life, and endowment policies.

Death benefit

The death benefit of a whole life policy is normally the stated face amount. However, if the policy is “participating”, the death benefit will be increased by any accumulated dividend values and/or decreased by any outstanding policy loans. (see example below) Certain riders, such as Accidental Death benefit may exist, which would potentially increase the benefit.

In contrast, universal life policies (a flexible premium whole life substitute) may be structured to pay cash values in addition to the face amount, but usually do not guarantee lifetime coverage in such cases.


A whole life policy is said to “mature” at death or the maturity age of 100, whichever comes first. To be more exact the maturity date will be the “policy anniversary nearest age 100”. The policy becomes a “matured endowment” when the insured person lives past the stated maturity age. In that event the policy owner receives the face amount in cash. With many modern whole life policies, issued since approximately 2000, maturity ages have been increased to 120. Increased maturity ages have the advantage of preserving the tax-free nature of the death benefit. In contrast, a matured endowment may have substantial tax obligations.


The entire death benefit of a whole life policy is free of income tax, except in unusual cases. This includes any internal gains in cash values. The same is true of group life, term life, and accidental death policies.

However, when a policy is cashed out before death, the treatment varies. With cash surrenders, any gain over total premiums paid will be taxable as ordinary income. The same is true in the case of a matured endowment. This is why most people choose to take cash values out as a “loan” against the death benefit rather than a “surrender.” Any money taken as a loan is free from income tax as long as the policy remains in force. For participating whole life policies, the interest charged by the insurance company for the loan is often less than the dividend each year, especially after 10–15 years, so the policy owner can pay off the loan using dividends. If the policy is surrendered or canceled before death, any loans received above the cumulative value of premiums paid will be subject to tax as growth on investment.

It should be emphasized that, while life insurance benefits are generally free of income tax, the same is not true of estate tax. In the US, life insurance will be considered part of a person’s taxable estate to the extent he possesses “incidents of ownership.” Estate planners often use special irrevocable trusts to shield life insurance from estate taxes.

Business uses

Businesses may also have legitimate and compelling needs, including funding of:

  1. Buy-sell agreements
  2. Death of key person
  3. Supplemental executive retirement plans (S.E.R.P.)
  4. Deferred compensation

While Term life may be suitable for Buy-Sell agreements and Key Person indemnification, cash value insurance is almost exclusively for Deferred Comp and S.E.R.P.’s.

Personal and family uses

Individuals may find whole life attractive because it offers coverage for an indeterminate length of time. It is the dominant choice for insuring so-called “permanent” insurance needs, including:

  • Funeral expenses,
  • Estate planning,
  • Surviving spouse income, and
  • Supplemental retirement income.

Individuals may find whole life less attractive, due to the relatively high premiums, for insuring:

  • Large debts,
  • Temporary needs, such as children’s dependency years,
  • Young families with large needs and limited income.

In the second category, term life is generally considered more suitable and has played an increasingly larger role in recent years.

Level Premium

Level premium whole life insurance (sometimes called ordinary whole life, though this term is also sometimes used more broadly) provides lifetime death benefit coverage for a level premium.

Whole life premiums are much higher than term insurance premiums, but because term insurance premiums rise with increasing age of the insured, the cumulative value of all premiums paid under whole and term policies are roughly equal if the policy continues to average life expectancy. Part of the insurance contract stipulates that the policyholder is entitled to a cash value reserve that is part of the policy and guaranteed by the company. This cash value can be accessed at any time through policy loans that are received income tax-free and paid back according to mutually agreed-upon schedules. These policy loans are available until the insured’s death. If any loans amounts are outstanding—i.e., not yet paid back—upon the insured’s death, the insurer subtracts those amounts from the policy’s face value/death benefit and pays the remainder to the policy’s beneficiary.

Whole life insurance may prove a better value than term for someone with an insurance need of greater than ten to fifteen years due to favorable tax treatment of interest credited to cash values. However, for those unable to afford the premium necessary to provide adequate whole life coverage for their current insurance needs, it would be imprudent to purchase less coverage than is adequate as whole life insurance rather than purchase an adequate level of term to cover their current need.

While some life insurance companies market whole life as a “death benefit with a savings account”, the distinction is artificial, according to life insurance actuaries Albert E. Easton and Timothy F. Harris. The net amount at risk is the amount the insurer must pay to the beneficiary should the insured die before the policy has accumulated premiums equal to the death benefit. It is the difference between the policy’s current cash value (i.e., total paid in by owner plus that amount’s interest earnings) and its face value/death benefit. Although the actual cash value may be different from the death benefit, in practice the policy is identified by its original face value/death benefit.

The advantages of whole life insurance are its guaranteed death benefits; guaranteed cash values; fixed, predictable premiums; and mortality and expense charges that do not reduce the policy’s cash value. The disadvantages of whole life are the inflexibility of its premiums and the fact that the internal rate of return of the policy may not be competitive with other savings and investment alternatives.

Death benefit amounts of whole life policies can also be increased through accumulation and/or reinvestment of policy dividends, though these dividends are not guaranteed and may be higher or lower than earnings at existing interest rates over time. According to internal documents from some life insurance companies, the internal rate of return and dividend payment realized by the policyholder is often a function of when the policyholder buys the policy and how long that policy remains in force. Dividends paid on a whole life policy can be utilized in many ways.

The life insurance manual defines policy dividends as refunds of premium over-payments. They are therefore not exactly like corporate stock dividends, which are payouts of net income from total revenues.

Modified whole life insurance features smaller premiums for a specified period of time, followed by higher premiums for the remainder of the policy. Survivorship life insurance is whole life insurance insuring two lives, with proceeds payable after the second (later) death.The level premium system results in overpaying for the risk of dying at younger ages, and underpaying in later years toward the end of life.


The over-payments inherent in the level premium system mean that a large portion of expensive old-age costs are prepaid during a person’s younger years. U.S. Life insurance companies are required by state regulation to set up reserve funds to account for said over-payments, which represent promised future benefits, and are classified as Legal Reserve Life Insurance Companies. The Death Benefit promised by the contract is a fixed obligation calculated to be payable at the end of life expectancy, which may be 50 years or more in the future. (see non-forfeiture values)

Most of the visible and apparent wealth of Life Insurance companies is due to the enormous assets (reserves) they hold to stand behind future liabilities. In fact, reserves are classified as a liability, since they represent obligations to policyholders. These reserves are primarily invested in bonds and other debt instruments, and are thus a major source of financing for government and private industry.


Martin Insurance and Financial Services LLC