How does a whole life insurance policy work

how does a whole life insurance policy work

How do Whole Life Insurance Dividends Work?

How do Whole Life Insurance Dividends Work?

How do Whole Life Insurance Dividends Work?

Whole life insurance, as the name implies, is insurance which provides coverage for the policyholder’s entire lifetime. Whole life policies can be divided into two categories: participating and non-participating. Both policies provide level premiums, lifetime protection and a guaranteed cash value—but participating whole life plans pay an annual dividend. The annual dividend is NOT guaranteed, and in most instances is linked to long-term interest rates as well as the insurance company’s performance. If you have an existing participating whole life policy which was purchased in a high interest environment, it is a good idea to request an updated policy illustration—the projected values may have changed dramatically.

Most participating whole life policies have multiple dividend options. The following is a brief look at some of the different dividend options:

Dividends on deposit – the annual dividend is kept on account within the policy

Paid-up additions – the annual dividend is used to purchase additional paid-up insurance

Premium reductions – the annual dividend is used to reduce the annual premium

Term option – the annual dividend is used to buy paid-up term insurance

By contrast, non-participating whole life policies have no dividends, and the value of these plans are guaranteed. Because non-participating whole life policies are fully guaranteed, they

can be instantly compared by our on-line insurance calculator. Non-participating whole life policies can be payable for the life of the policy, or they can be paid up after a specific period of time (such as for 25 years, 20 years, 15 years or 10 years, or when the insured reaches age 65). The shorter the policy payment period, the higher the premium. The guaranteed cash surrender value of whole life policies vary by the amount of coverage, length of time paid, and the company issuing the coverage.

Below is an example (the rates and values are as of Feb 2008) comparing a participating and non-participating whole life policy, using a

30-year-old male non-smoker with $250,000 of whole life coverage paid up in 20 years:

  • Non-participating Empire Life Policy

Annual premium – $1,492.50

20-year contribution – $29,850

Death benefit at year 20 – $250,000

Death benefit at age 65 -$250,000

Cash value at year 20 – $31,750

Cash value at age 65 – $64,500
  • Participating Empire Life Policy (paid-up additions assumes the current dividend rate)

    Annual premium – $6,672.50

    20-year contribution – $133,450

    Death benefit at year 20 – $680,776

    Death benefit at age 65 – $1,273,845

    Cash value at year 20 – $147,164

    Cash value at age 65 – $513,881

Source: lsminsurance.ca

Category: Insurance

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