What whole life insurance actually is
Whole life insurance is permanent cover with three things fixed by the contract: the premium, the death benefit, and a schedule of cash value that builds over time. The premium set at issue is the premium for life. The death benefit does not expire at an age and does not reprice. The cash value grows at a rate the contract states, and many policies from mutual carriers may also pay dividends, which are not guaranteed.
It is the oldest form of life insurance and the simplest permanent one. There is no index to track and no flexible premium to manage. What you buy is certainty: a known cost, a known payout, and a pot that is yours to use while you are alive.
Who it suits, and who it does not
It suits people with a permanent need: final expenses, leaving money to children or a cause, equalising an estate between heirs, or providing for a dependant who will never be independent. It suits people who value a fixed budget they can plan around for decades, and people who want a policy their family can rely on without anybody having to manage it.
It does not suit somebody who needs a large amount of cover for a limited time; term buys far more cover for the same money during the years a mortgage and children are the exposure. It does not suit a tight budget, because the fixed premium is a long commitment and a policy that lapses in its early years returns little. And it does not suit anybody comparing it to a market investment: it is insurance with a savings element, not an investment, and the comparison flatters the investment.
What decides the premium
Age at application, health, the amount of cover, and the payment structure. Some whole life policies are paid for life; others are paid up over a fixed period, such as until a certain age, after which no further premium is due and the cover continues. A shorter payment period means a higher premium and a policy that is fully owned sooner.
Health is underwritten, usually with a medical exam for larger amounts. Because the premium is fixed for life, the age and health at issue set the price permanently, which is the strongest argument for buying whole life earlier rather than later if it is the right product at all.
How the cash value works, and its limits
The cash value builds slowly at first, because early premiums carry the cost of insurance and the policy's charges, and more quickly in later years. It can be borrowed against, and a loan is not a withdrawal: the policy continues, interest accrues on the loan, and an unpaid loan reduces the death benefit. It can also be surrendered for its cash value, which ends the cover.
Dividends, where a policy pays them, can be taken as cash, used to reduce the premium, or used to buy additional paid-up cover. They depend on the carrier's results and are not promised. Anybody shown a dividend projection should treat it as a possibility, not a schedule.
Five questions to ask before you sign anything
What is guaranteed by the contract, and what depends on dividends? For how many years is the premium payable? What is the guaranteed cash value at ten and twenty years, on the guaranteed column of the illustration? What is the loan interest rate, and how is it set? And what riders are included or available, such as a waiver of premium on disability?
In a consultation with BrightCover those answers are read from the contract and the guaranteed columns, not the projected ones, before any application is started.
