Different Types of Whole Life insurance Policies Explained

Most people today plan their retirement with effective pension schemes and insurance plans to stay financially independent. 

However, if you have family members and dependents, you should also ensure their security in your absence. Whole life insurance is a comprehensive policy that takes care of this agenda along with added income. There are various types of whole life insurance plans that you can go through to understand their value and usage.

Whole life insurance is a type of policy that offers financial protection to your dependents in the form of death benefits in case of your unfortunate demise. The term "whole" implies that the policy will provide coverage for your entire lifetime. As a result, in exchange for regular premium payments, the policy will remain in existence for the duration of your life.

Moreover, if you survive past the maturity period, which is usually 100 years in this case, you will receive a maturity/survival benefit which is absent in plans like term insurance. Therefore, no matter how long you live, you will get a guaranteed benefit of the sum assured.

Whole life insurance plans could be an option to think about if you have specific but complex financial requirements.

Consequently, these policies come in various forms, each of which is created to meet a different set of needs. To learn more about which might be right for you, read on.

Here are the types of whole life policies based on guaranteed and non-guaranteed returns:

1. Non-Participating Whole Life Insurance

A non-participating whole life insurance policy has a constant premium and face amount for the duration of your lifetime. The fixed payment and comparatively low out-of-pocket premium payments are advantageous. However, the most important feature is that these policies are non-participating in nature and thus, do not allow non-guaranteed bonus payments to you.

So, it is a favourable option if you are looking for an affordable premium with a guaranteed return of the sum assured. 

2. Participating Whole Life Insurance

Participating whole life insurance pays bonus based on company’s profits from their participating funds. These bonuses can be taken as regular payout, subsequently deducted from your premiums, or even added to the cash value of your policy. They are tax-free and are affected more by your insurance provider than by the type of insurance policy you select. 

However, bonus payments effectively depend on the excess profits that the company has amassed through investment of their participating funds. Therefore, there is no assurance that bonus will be paid to policyholders and in what percentage. It’s the non-guaranteed portion.

3. Indexed Whole Life Insurance

In this type, the cash value increases at a rate determined by your insurer. It also includes a fixed minimum amount and a potential maximum limit. However, the cash value also depends on the success of the invested funds selected by your insurance provider.

Note that this plan offers you a chance to increase the cash value of your plan with a significantly higher fee to manage your earnings. Moreover, not all policies under this category let you change your death benefit or pay premiums from the cash value.

4. Variable Whole Life Insurance

In a variable whole life insurance plan, you decide which funds to use. Therefore, these policies offer you better control over the funds you invest in. So, naturally, the cash worth also decreases or increases at your discretion.

Note that your policy provider will offer you only a range of investment options from which you can choose. Additionally, this type of policy also comes with a hefty fee on the profits, similar to indexed whole life insurance policies.

5. Ordinary Whole Life Insurance

This is a standard type of whole life insurance policy, where you will continue to pay premiums to keep your policy in force. In return, your insurer will offer a lump sum to your beneficiaries in case of an unfortunate event. This sum is known as the death benefit. In addition, if you survive the policy term of 100 years, you will receive the assured sum as a survival or maturity benefit.

However, the premiums for this type of plan are slightly higher as it builds up a cash value through the policy term.

6. Limited Payment Whole Life Insurance

Limited payment plans require you to pay premiums for a limited period. For instance, in a whole life insurance plan, you may have to pay the premiums for 20 years instead of a total of 30 years to get full coverage till the age of 100. 

Therefore, this option can be valuable, as it allows you to pay off the premiums while you still earn to enjoy attractive returns post-retirement. 

Once the entire premium is paid, the policy will remain active for the entirety of your life, offering death benefits or maturity pay-outs when the time comes.

This plan may benefit you if you need more time to be financially adept at paying the premiums after retirement. However, the rate of payment is also important here since the payment tenure is shorter. Therefore, the benefit of this type of insurance policy is that it eases the burden of paying premiums, especially in the later stages of your life.

7. Modified Premium Whole Life Insurance

As the name suggests, in a modified payment plan, there is an initial payment in the early years, which is lower than what the usual amount should be. For instance, if your whole life plan tenure is 50 years, you may have to pay a lower amount for the first five years. These periods vary based on the policy you choose and your insurance provider. However, after this period, the rate will go up.

The cash value of a modified plan is moderate and tax-free. However, it may be helpful for you if you are starting off your career at an earlier stage and you need to be financially strong. With the increased years, a higher income will make a higher premium easier to pay.

8. Single Premium Whole Life Insurance

In this type of plan, you are required to pay the total premium at once in a lump sum. The payment has to be made when the policy is issued in the beginning so that there is no further need for payments throughout the policy tenure.

The benefit of this plan is that it comes with a high loan value and an immediate cash value since the premiums are already paid. However, the amount will depend on the amount of lump sum cash paid. 

This can be a useful investment cum insurance product, given that you are able to pay a significant lump sum premium. Consequently, it is favourable only if you have a steady flow of income or sufficient savings to afford the considerable premium expense.