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Whole Life Insurance Offers Protection For An Entire Lifetime

By Mike Heuer

Whole life insurance is a kind of policy that stays with the insured party for his or her entire life and builds cash value over time. Also called permanent life insurance, the policies require monthly or annual premiums to be made until the cash value equals the insured amount. The plans protect against the death of the named insured, which is the person on whom the insurance is based.

To obtain the policies, a medical exam almost always is required, and people who smoke tobacco products or engage in risky activities or have dangerous jobs sometimes can be either excluded from coverage and almost always have higher premiums to pay than others. Rates are based on health and mortality for people the same age as the insured individual at the time the plan is bought.

There are many reasons to buy whole life insurance with the primary one being to leave a financial legacy for heirs. The policies are intended to grow cash value over the years and in most cases will provide a financial benefit upon the death of the named insured party. If the names insured should live to age 100, the policy will deliver pay the benefit amount as insurance companies consider 100 years to be a lifetime. Otherwise, the plans will pay the benefit amount upon the death of the named insured.

There are essentially three and sometimes four parties involved in a whole life plan. The first is the insurer, which, of course, underwrites the policy and maintains it so long as all premiums are paid in full. The second party is the named insured, upon whom all premium amounts are determined based on health and average mortality rates for people of the same age and health condition. The beneficiary is the person or person to whom the death benefit will be paid and often times is either a spouse or children. The policyholder might be a fourth party to the insurance contract but often times is either the named insured or a beneficiary.

There are several ways in which an insurance company makes money from providing permanent life insurance plans. The first is off the fees and commissions paid during the first three years the coverage is in force. In fact, nearly every cent paid in premiums during the first three years the policy is in force will go toward commissions, fees and maintenance costs and will not build cash value.

Cash value typically will not grow until at least the fourth year a policy is in place. An insurer also profits off the narrow margin provided by policies, usually getting an about 3 percent margin, which is invested to generate a greater profit, according to the National Association of Insurance Commissioners. Including investment profit, most insurers reap an about 7 percent margin for their underwriting efforts.

Cash benefits are not always paid only when the named insured dies or reaches age 100. Depending on the type of plan or if an additional rider is purchased, many policies also provide protection for permanent disabilities and diagnosis of terminal illnesses, at which point up to half of the benefit amount will be issued to help cover the costs of medical treatments and other necessities arising from the change in health.