Whole Life Insurance In RI & MA

What is Whole Life Insurance?

A whole life insurance policy is designed to provide permanent insurance protection for one's whole life (i.e. from the date the policy is issued until the insured dies) as long as the premiums are paid. It not only provides insurance protection, it also accumulates cash value.  A whole life policy should be considered for permanent needs.  That is, those needs that you will not out-live such as your funeral, pension protection, estate taxes, etc.

A whole life insurance policy is designed to mature (‘endow’) when the insured reaches the age of 100. If every premium is paid from the date of the policy issue until the insured reaches the age of 100, the policy would be fully paid-up (the cash value would equal the face value) and premium payments would cease. If the policyowner dies during the term of the policy, the insurance company will pay the face amount, which includes the cash value.

The primary purpose for purchasing a whole life policy is for the death benefit to provide security for those you love, etc., but whole life policies have other outstanding benefits as well. These are:

• the death benefit paid to the beneficiary is free of income tax;
• the policyowner can borrow from the cash value within the policy; and,
• the money taken out as a loan is not subject to income tax whether or not the loan is repaid.

The policy face amount and premium rates are set when the policy is issued and remain level for the term of the contract. During the early years of the policy, the policyowner is younger and, because of the level premium rates, and more premium is paid in the early years than is required to fund the insurance. Because there is a guaranteed interest rate incorporated in the policy, the policy earns cash value at a rate designed to endow by the time the policyowner reaches the age of 100. Because very few people live to be 100, the whole life insurance policies will most likely either be surrendered for the cash value or the death benefit will be paid when the policyowner dies. That is why this is considered a "permanent" policy.

Since the policy has cash value, the policyowner can borrow the funds by paying a low interest rate guaranteed in the policy. If an outstanding loan is not repaid at the time of death of the policyholder, the beneficiary would receive the face amount less the amount of the outstanding loan and any unpaid interest due on the loan. However, if the policy lapses for failure to pay the premiums or is surrendered, any outstanding loan is considered a taxable gain. One must be careful  not to over-borrow from the cash value and to leave enough cash value in the policy to keep the policy in force in case the insured lives to an old age. Additionally, the policy itself, since it has value and is considered property.  You own it.   Therefore, it can be used as collateral or security for loans.

Death benefits are paid to the beneficiary free of income taxes. Life insurance is the only plan that can make this guarantee.

The basic forms of whole life insurance policies are:

• straight whole life – provides a fixed face value and level premiums until the policyowner reaches the age of 100 or dies during the policy years.

• limited pay whole life– the face value stays the same and the insurance protection extends until death or the age of 100; however, the premiums can be paid for a specific period of time or to a specific date (e.g., 20 years or the 65th birthday of the policyowner) to fully pay the policy.

• single premium whole life (SPWL) – The policyowner can make a single large one-time premium payment at the beginning of the policy period to fully pay the policy. This policy will have immediate cash value and allow the policyowner to borrow from the policy at a low interest rate.
  Note – to avoid becoming a Modified Endowment Contract there are certain rules and tests limited pay and single premium policies must follow.

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This material contains only general descriptions and is not intended as any financial or tax advice. For information about specific insurance needs or situations, request a quote or contact us at (401)474-6601 or e-mail us at admin@rhodeisland-insurance.net for a free quote or home visit.