Identification

• Whole life insurance--also known as permanent insurance--provides life coverage, usually to age 100, as opposed to a set period of time, and it has no termination date as long as premiums are kept current. The elements of a whole life insurance policy are the premiums paid, the death benefits, and the cash surrender value. While an insurer pays higher monthly premiums than other types of life insurance, the extra he pays is invested by the insurance company and builds cash value. According to the New York State Insurance Department, "to keep the premium rate level, the premium at the younger ages exceeds the actual cost of protection. This extra premium builds a reserve (cash value) which helps pay for the policy in later years as the cost of protection rises . . ."
  
  

Types

• Whole life insurance comes in two basic types: traditional and interest-sensitive. Traditional whole life policies estimate expenses, interest and mortality. The premium amounts, death benefits payable and cash values are set out in the policy. Interest-sensitive whole life insurance earmarks investment earnings based on current interest rates, and cash value can go up and down depending on the state of the market.
  
  

Variations

• Traditional whole life is available as non-participating, providing for a level premium and face amount; participating, which pays dividends; indeterminate premium whole life, which has adjustable premiums; economatic whole life, which offers supplemental coverage using dividends; limited payment whole life, which offers lifetime protection with a limited number of premium payments; and single-premium whole life, where one large premium is paid up front. Interest-sensitive whole life insurance is available as universal life, excess interest whole life, current assumption whole life, or single premium whole life. All are similar variations of a universal life insurance policy.
  
  

Advantages

• Whole life insurance builds tax-deferred cash value over the course of a policyholder's lifetime, premium payments never increase, payout is guaranteed, and a policyholder may be able to stop making premium payments at a certain age. According to Budget Life.com, "if you decide to cancel your whole life policy, you are entitled to receive the cash value. Additionally, you may borrow against the cash value at a reasonable interest rate. When you die, funds will be deducted from the insurance proceeds to pay the amount of any loans and interest, if you have not paid them off."
  
  

Disadvantages

• Whole life insurance premiums may be much higher than for other types of life insurance because a portion of the monthly premium paid is used to invest and build cash value. Whole life insurance policies actually have a termination date--usually on a policyholder's 100th birthday--so if he lives until 100, his policy will end and he'll get the equivalent of his cash value. Insurers are not allowed to choose their own money market, stock or bond funds; the insurance company does it for them so a policyholder has no control as to where his money is being invested.