Whole Life Plans

Whole life policies all offer lasting coverage, possible dividends, tax benefits, and cash value growth. However, whole life insurance policies can differ in how their premiums are paid, how the insurer shares profits with the policyholder, and how premiums are invested. On this page, we'll discuss seven of the most common variations of a whole life insurance plan.

1. Non-participating. The values of the whole life policy, such as the cash value, premiums, and death benefit, are determined when the policy is issued and cannot be changed afterwards. In other words, the life insurer assumes all risk with regard to future performance. That is, if the life insurer underestimates the expense of future claims, the insurer is responsible for making up the difference. Conversely, if the life insurer overestimates the cost of future claims, the insurer still keeps the difference.
2. Participating. A participating whole life insurance plan requires the life insurer to share excess profits with their policyholders. The insurer issues these profits to policyholders in the form of refunds, or dividends, which are not taxable because the insurance company initially overcharged the policyholder.
3. Indeterminate premium. The same as a non-participating whole life insurance plan, but the premiums can vary from year to year. The premium, however, cannot exceed the maximum premium amount allowed in the policy contract.
4. Economic. This form of whole life insurance is a hybrid of term life and a participating whole life insurance plan. With economic whole life, the insurer uses a portion of the policyholder's dividends to purchase additional term life insurance. Typically, this results in a larger death benefit but reduces the long-term cash value of the policy. If dividends fall short of projections in some years, the death benefit during those times may also be reduced.
5. Limited pay. This is identical to a participating whole life insurance plan, but the policyholder only has to pay the premiums for a certain number of years rather than every year until death. For example, a limited pay whole life policy may have premiums due for the first 20 years, after which the policy is considered paid up.
6. Single premium. A type of limited pay whole life insurance policy where the policyholder must make a lump-sum payment up front. Single premium policies usually charge policyholders penalties if the policy is cashed in during the first few years of coverage.
7. Interest sensitive. This is a new form of whole life insurance not offered by all life insurance companies. The interest on these policies will vary according to market conditions, meaning the premiums may change but the death benefit never will.