Types of Whole Life Insurance

Although marketed under various names, there are two main types of whole life insurance, distinguished by premium pricing and the allocation of policy risk.

Single premium: This is the most basic type of whole life insurance. The insured pays a fixed premium, which continues accumulating as cash value and provides coverage as long as premiums are paid.

Limited pay: This type of policy has higher premiums in its early years, with lower premiums or no premiums in later years.

Modified premium: In contrast to a limited-pay policy, this type of whole life insurance offers lower premiums during the first part of the policy's life.

Another distinction among whole life insurance policies is between participating and nonparticipating plans. With a nonparticipating policy, any premiums collected in excess of payouts become profit for the insurer. However, the insurer also assumes the risk of losing money.

With a participating policy, any excess premiums are redistributed to the insured as a dividend. This dividend can be used to make payments or increase the policy's limits.

Some Names Under Which Whole Life Policies Are Marketed

Single-Premium Whole Life Insurance

Single-premium life insurance is a whole life policy funded through one upfront lump-sum premium payment. Its cash value grows at a fixed rate set by your insurer.

Indexed Whole Life Insurance

Indexed whole life insurance is a permanent life insurance option with a cash value account that earns interest based on an investment index chosen by the insurance company, such as the S & P 500.

Modified Whole Life Insurance

Modified whole life insurance is a type of whole life policy that offers lower premiums for a short period, usually the first two to five years, followed by much higher premiums for the remainder of the policy.

Dividend-Paying Whole Life Insurance

Dividend-paying whole life insurance refers to a whole life policy that pays policyholders an annual bonus if the insurance company outperforms financially. Policy dividends can be paid by check, applied to future premiums, or used to purchase additional coverage.

Infinite Banking Whole Life Insurance

Infinite banking life insurance refers to a financial strategy in which you purchase a whole life or universal life insurance policy and eventually use its cash value, rather than a traditional bank, to obtain a loan. As we have mentioned in previous posts, cash value can take years to accumulate, so this is generally not a stand-alone solution for financial planning.

Simplified-Issue Whole Life Insurance

Simplified-issue whole life insurance offers a small amount of permanent coverage and does not require a medical exam. It is called simplified issue because its underwriting process is less extensive. You can generally obtain coverage of up to approximately $50,000, depending on the insurer.

Guaranteed Issue

Guaranteed-issue life insurance is a type of whole life insurance that offers nearly certain approval and does not require a medical exam to apply. The maximum coverage amount is usually $25,000.

Joint Whole Life Insurance

Joint whole life insurance covers two people under one policy. First-to-die policies pay the death benefit when the first of the two people dies, while second-to-die policies, also called survivorship policies, pay when the second person dies. Second-to-die policies are primarily used for estate planning.

Variable Whole Life Insurance

With variable whole life insurance policies, cash value is invested in various funds offered by your insurer. You may earn more interest this way than with a traditional whole life policy, but you assume greater investment risk if the selected funds underperform.