Participating

In a participating policy (also par in the USA, and known as a with-profits policy in the Commonwealth), the insurance company shares the excess profits (variously called dividends or refunds in the USA, bonus in the Commonwealth) with the policyholder. Typically these refunds are not taxable because they are considered an overcharge of premium. The greater the overcharge by the company, the greater the refund/dividend. For a mutual life insurance company, participation also implies a degree of ownership of the mutuality.

Indeterminate Premium

Similar to non-participating, except that the premium may vary year to year. However, the premium will never exceed the maximum premium guaranteed in the policy.

Economic

A blending of participating and term life insurance, wherein a part of the dividends is used to purchase additional term insurance. This can generally yield a higher death benefit, at a cost to long term cash value. In some policy years the dividends may be below projections, causing the death benefit in those years to decrease.

Limited Pay

Similar to a participating policy, but instead of paying annual premiums for life, they are only due for a certain number of years, such as 20. The policy may also be set up to be fully paid up at a certain age, such as 65 or 80.^[5] The policy itself continues for the life of the insured. These policies would typically cost more up front, since the insurance company needs to build up sufficient cash value within the policy during the payment years to fund the policy for the remainder of the insured's life.

Single Premium

A form of limited pay, where the pay period is a single large payment up front. These policies typically have fees during early policy years should the policyholder cash it in.

Interest Sensitive

This type is fairly new, and is also known as either excess interest or current assumption whole life. The policies are a mixture of traditional whole life and universal life. Instead of using dividends to augment guaranteed cash value accumulation, the interest on the policy's cash value varies with current market conditions. Like whole life, death benefit remains constant for life. Like universal life, the premium payment might vary, but not above the maximum premium guaranteed within the policy

Requirements

Whole life insurance typically requires that the owner pay premiums for the life of the policy. There are some arrangements that let the policy be "paid up", which means that no further payments are ever required, in as few as 5 years, or with even a single large premium. Typically if the payor doesn't make a large premium payment at the outset of the life insurance contract, then he is not allowed to begin making them later in the contract life. However, some whole life contracts offer a rider to the policy which allows for a one time, or occaisional, large additional premium payment to be made as long as a minimal extra payment is made on a regular schedule. In contrast, Universal life insurance generally allows more flexibility in premium payment.

Types

There are several types of whole life insurance policies.^[2] New York State defines six traditional forms: non-participating (aka "non par"), participating, indeterminate premium, economic, limited pay, and single premium.^[3] A newer type is known generally as interest sensitive whole life. Other jurisdictions may classify them differently, and not all companies offer all types. It should be noted that there are as many types of insurance policies as can be written in their contracts while staying within the law's guidelines.

Non-Participating

All values related to the policy (death benefits, cash surrender values, premiums) are usually determined at policy issue, for the life of the contract, and usually cannot be altered after issue.

This means that the insurance company assumes all risk of future performance versus the actuaries' estimates. If future claims are underestimated, the insurance company makes up the difference. On the other hand, if the actuaries' estimates on future death claims are high, the insurance company will retain the difference.

Whole life insurance

Whole Life Insurance, or Whole of Life Assurance (in the Commonwealth), is a life insurance policy that remains in force for the insured's whole life and requires (in most cases) premiums to be paid every year into the policy.

History

All life insurance was originally term insurance. However, because term life insurance only pays a claim upon death within the stated term, most term insurance policy holders became upset over the idea that they could be paying premiums for 20 or 30 years and then wind up with nothing to show for it.

In response to market pressures, actuaries conceived of an insurance policy with level premium payments that were higher than traditional term insurance contracts. These contracts would offer a "cash value", which was designed to be a cash reserve that would build up against the known claim - the death benefit. These policies would also credit interest to the cash value account and upon maturity of the contract (usually at age 95 or 100), the cash value would equal the death benefit.

This produced a benefit to both the policy owner and the insurance company. By guaranteeing the death benefit and the cash value, the policy owner was assured that insurance coverage would be in force when the insured died. The insurance company benefited because with every premium payment made, the net amount at risk, and thus the cost of insurance, was reduced.^[1]

Working with an agent

After reviewing the various life insurance policies available, you might still be unsure about which best meets your needs. The American Council of Life Insurers (ACLI) recommends consulting an insurance agent. Jack Dolan, spokesperson for ACLI, says an agent can help find a policy that is specific to your needs. “Look at the recommended policy with care to be sure it fits your personal goals," Dolan says.

Carefully study your agent's recommendations and ask for a point-by-point explanation. Make sure the agent explains items you don't understand. Because your policy is a legal document, it is important that you know what it provides.

ACLI suggests these tips when purchasing life insurance:

• Ask for specifics of coverage so you can look at all your options.
• Contact the state insurance department to determine if a company or agent is licensed in your state.
• Check financial strength ratings to determine if your potential insurer is financially stable.
• Be wary of offers of "free" life insurance policies. Nothing is free. A good example is "stranger-originated life insurance" where the elderly are offered money from investors to buy their insurance policies.
• Answer all application questions honestly. Do not omit information.
• Make sure you get your policy within 60 days; if not, contact your insurance company to find out why.
• Your state likely guarantees a "free look" period, which is often 10 to 30 days after the policy has been in effect. If you decide you don't want to keep the policy, you will be given a full refund.
• Check the effective date on the policy.
• Review your policy every year or when a major life event occurs, such as buying a new house, having a child or getting married or divorced.
• If you have a complaint with an insurance company that isn't resolved after contacting a customer service representative, your state's department of insurance can help.

Insurance experts recommend these tips when deciding which type of life insurance to purchase:

If your agent recommends a term life policy, ask:

• What are the Standard & Poor's, A.M. Best, Fitch and Moody’s ratings of this insurance company?
• What is the initial rate-guarantee period? Is this policy renewable past the initial rate-guarantee period without a physical exam? If so, what are the premiums?
• Is this policy convertible to permanent insurance without a physical exam? If so, for what period of time do I have the right to convert?

If your agent recommends a cash value policy, ask:

• What are the Standard & Poor's, A.M. Best, Fitch and Moody’s ratings of this insurance company?
• Can you tell me, in writing, why you are recommending cash value insurance for me at this time?
• Why should I combine my life insurance protection needs with my investment objectives?
• Can you please prepare an analysis for me that shows the true cost of this cash value insurance policy over 5, 10, 15, 20, 25 and 30 years versus buying term life and investing the difference in long term bonds over those same time periods?
• How much is your first-year commission on this proposed cash value policy versus your commission on an equivalent term life insurance policy?
• Are these proposed annual premiums within my budget?
• Why do you think that I can commit to paying these premiums over the long term, perhaps decades?
• How much will I receive if I surrender the policy?

How life insurance is priced

Life insurance is priced based on your life expectancy, the face amount you request and the length of the policy, whether it's the duration of your life (permanent life) or a specific period (term life).

Because your current and past health conditions impact your life expectancy, insurers want to know as much as possible about your health condition. Common conditions such as high blood pressure, heart disease, obesity, cancer and depression can all raise your premiums or even result in your being declined.

Based on your medical history, you'll be grouped into a category such as "preferred plus," "preferred," "standard" and "substandard." Your category ultimately determines your premiums. For more, read how life insurance companies view you: Underwriting categories.

Insurance buyers with severe health conditions or a combination of conditions can find it hard or impossible to find life insurance. They are known as "impaired risks." Local agents may not be experienced enough to find a company that specializes in insuring people with certain medical conditions. Fortunately, impaired-risk specialists have expertise in knowing where to direct applications for folks with medical conditions. For more, read how impaired-risk specialists find life insurance for people with medical problems.

The life insurance buying process

The life insurance applications process is paper-intensive, can take 30 to 45 days and often seems intrusive for people who value their privacy. A face-to-face paramedical examination is generally required for policies in excess of $100,000, which means, at minimum, giving both blood and urine samples to a paramedical professional.

Expect questions in detail regarding your lifestyle, intended foreign travel destinations, your family health history and your personal health history.

Expect questions in detail regarding your lifestyle, intended foreign travel destinations, your family health history and your personal health history.

Sometimes multiple interviews are required in order to verify your information. The paramed examiner typically asks these questions face-to-face and often insurance companies will conduct follow-up telephone interviews so that you can verify the first set of answers. Regardless of the type of life insurance you buy, most policies require you to meet certain guidelines regarding your lifestyle and medical history.

For more, here's the lowdown on life insurance medical exams.

If it sounds tempting to shortcut this process by withholding information or outright lying, don’t do it. Policies that were sold based on applications that contained misleading information can be voided at claim time. False information on insurance applications is fraud.

Insurers will likely report your medical exam results (reported as numbered codes) to MIB (formerly called the Medical Information Bureau), which maintains a database of those who have applied for life, health, disability and other insurance in the last seven years. If you've given different answers to medical questions in the past, it will raise a red flag with MIB. The goal of the MIB database is to reduce fraud.

All standard life insurance policies cover death by any cause at any time in any place, except for death by suicide within the first two policy years (one year in some states).

If you want to avoid the underwriting process, you have two other, more expensive, options:

• Simplified issue life insurance can be purchased after answering only a few medical questions. There is no medical exam required. However, if you report health problems, you will likely be declined. Also, if you are healthy, or even if you have some negative medical history, an underwritten policy is still going to be your least expensive choice.
• Guaranteed issue life insurance is sold to anyone who applies (up to an age limit) and is by far the most expensive way to purchase life insurance. This should be considered only by those who are declined for everything else but still need life insurance. These policies have graded death benefits, meaning your beneficiaries won't receive the full death benefit until several years into the policy.

In naming a beneficiary, keep in mind that the life insurance company will want to see only the names of those who are financially dependent upon you. An acquaintance, friend or relative, absent of a financial relationship, will not do.

Universal life insurance

This kind of policy offers greater flexibility than whole or term life. Universal life has many moving parts to understand before you buy.

After your initial premium payment, you can reduce or increase the amount of your death benefit. Also, after your initial payment, you can pay premiums any time and in any amount, as long as you don’t miss a minimum payment level. In some cases, there are limits to how much extra you can pay in advance. If you choose to increase your death benefit, you may have to provide medical proof that your health has not deteriorated.

Some universal life policies perform like term life insurance: They can be configured at the time of purchase to provide both level death benefits and level premiums that are guaranteed for life as long as you pay the scheduled premium.

Variable life insurance

Variable life offers a death benefit with a side fund that operates like an investment account.

The insurance company invests your premiums and offers you a choice of funds in which your money will be invested. Returns are not guaranteed. The amount of money your beneficiaries will receive and the cash value of your policy depend on how well the underlying accounts perform. Theoretically, the cash value can go down to zero and, if so, the policy will terminate. Some variable life policies will guarantee a minimum death benefit.

Other permanent life considerations

When your cash value account grows large enough, it can be used by the insurer to pay your premiums for the rest of your life. This is known as being "paid up." You can still withdraw your cash value, but you'll have to resume premium payments to keep the policy in force or settle for a reduced benefit that the remaining cash value can support. Your policy illustration will show you how long it may take for your whole life policy to be "paid up."

If you no longer want your whole life policy, you can surrender it to receive the current cash surrender value or convert it into an annuity, but keep in mind that cashing in a permanent policy after only a couple of years is an expensive way to get insurance coverage for a short time.

For more on permanent life insurance, see the basics of whole life insurance.

Riders add benefits

You can add riders to your life insurance policy that guard against a number of unpleasant situations. Your insurer will have its own list of available riders, but here are a few:

• Accelerated death benefit rider (aka living benefits rider): Pays the benefit early if you become terminally ill.
• Accidental death benefit rider: Pays an extra benefit if you die as the result of an accident.
• Long term care rider: Pays for long term care expenses should you not be able to do some of the "activities of daily living," such as dressing or toileting.
• Waiver of premium rider: Waives premium payments should you become totally disabled.

Cash value life insurance

If you want more than a death benefit from your life insurance policy and like the idea of a long-term savings account (not insured by any federal agency) or investment, you might consider cash value life insurance such as whole life, universal life or variable life. But be prepared to pay much higher premiums per $1,000 of coverage because you are now funding a cash value account and paying fees and expenses.

Additional Resources Consumer Federation of America's Insurance "Rate of Return" Service www.evaluatelifeinsurance.org Insurance Information Institute: Learn about life insurance www.iii.org/life Your state's department of insurance may also have life insurance buying guides online, such as California's Life Insurance Information Guide and New York's Life Insurance Resource Center.

In many cash value policies, the annual premium does not increase from year to year. Universal life policies allow you to fluctuate or even skip premium payments, which in turn adjusts your death benefit amounts.

Unlike term life insurance, which is easily compared online, cash value insurance is often marketed by agents and brokers in a face-to-face setting, where needs and strategies can be discussed.

Because of the complexity and dizzying array of possible outcomes for permanent life insurance, regulators insist that cash value insurance be sold using pre-approved illustration formats. These illustrations can run to 15 or more pages.

Pay particular attention to the guaranteed death benefit and premium-payment sections because these columns contain the actual company promises. If you don’t like what you see there, walk away.

Another caveat: Many cash value policies contain harsh penalties for surrendering the policies in the early years. Changing your mind within the first few years is an expensive decision.

For more on cash value and an example of a policy illustration, read about cash value in life insurance: What's it worth to you?.

Whole life

Ordinary whole life insurance offers “permanent protection” with a cash value account that grows over time. Whole life provides a level death benefit and level premiums throughout your life and for as long as you continue to pay the premiums. For example, a healthy 40-year-old female might pay $4,200 per year for a $500,000 whole life policy. The premium remains level at $4,200 per year for the rest of her life and, in the event of death at any age, the policy will pay $500,000 to her beneficiary.

Whole life also contains a cash value account that builds over time.

Whole life also contains a cash value account that builds over time, slowly at first and gaining steam after several years. You can withdraw your cash value or take out a loan against it, but remember, if you die before you pay back the loan, the death benefit paid to your beneficiaries will be reduced.

Understand what your beneficiaries will receive upon your death. If you have a traditional whole life policy, your beneficiaries receive only the death benefit no matter how much cash value you've built up. Other payout options available for higher premiums are:

• Death benefit plus cash value
• Death benefit plus return of premium

Whole life policies can be issued as "participating" or "nonparticipating." Participating policies typically cost more but may return annual dividends if the insurer has a good financial year. Dividends are never guaranteed. Nonparticipating whole life insurance offers no dividends.

Buyers of whole life insurance like the certainty of fixed premiums with a known death benefit for life. They also appreciate the "forced savings" component and watching their cash value account build up.