Whole life insurance (also known as permanent insurance)  comes in four formats; Participating, Non-participating, Term to 100 and Universal life. Each has it’s own advantages. Premiums are guaranteed for life.  Some insurance companies offer limited pay options (8, 10 or 20 years).

Participating policies are offered by only a few life insurance companies.  In this type of policy the company shares it’s profits with policy holders in the form of annual dividends.  These dividends can be paid out as cash, be held in an investment account, be used to automatically buy more participating insurance, be used to reduce the premiums, or be used to replace term insurance in an “enhanced” policy.

Non-participating policies do not share in profits and do not grow in value.  They do build a “cash surrender value” and a “reduced paid-up insurance” feature. The cash value can be used as collateral for a loan from the insurance company. The paid-up insurance means that at some time in the future you can choose to stop paying premiums and you will have a reduced amount of insurance without future premiums.

Term to 100 (T-100) has become very popular and is usually the lowest cost permanent insurance.  It is a stripped down insurance policy, most often with no cash value.  (In this very competitive industry some companies have added cash values and other features to their T-100 policies.)

Every Whole Life insurance policy builds a cash value. Cash values with some companies begin in the first year, other companies won’t offer cash value for several years. Participating policies have greater cash values, sooner. The cash may be useful in several ways. If the policy is no longer needed, it may be cancelled and surrendered for the “cash surrender value”. (Depending on the duration of the policy and amount of cash, some of this may be taxable).

A common use is to borrow cash from the policy. This is actually borrowing from the insurance company, using the cash value as collateral for the loan. Interest on the loan will accumulate and, if not repaid prior to death, the total amount of the loan and interest will be deducted from the death benefit. Another common use of the cash is for “premium offset”, or sometimes called a “premium holiday”. In this case the cash is simply used to pay the insurance premium. Like a loan, it accumulates with interest and will reduce the death benefit by the outstanding amount.

Whole life policies include a “non-forfeiture” clause. To protect the policy from lapsing,  the cash value will be used to pay the premium if the regular payment is not made.

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