Blog
The Whole Story of Whole Life
October 23, 2017
Facts & Tips, Life Insurance Corner, What’s New,
Whole life is the most versatile financial instrument ever devised for the protection of families and businesses and the creation and enhancement of wealth. To appreciate the great values of this type of life insurance protection, this article explores how it works, its uses, its benefits and the options you have in structuring a contract to meet your specific needs, and why Auto-Owners Life Insurance is the company of choice. “Whole life provides lifetime insurance protection with significant guarantees and tax benefits…” DID YOU KNOW… Walt Disney, unable to land a substantial bank loan, used the cash value from his whole life policy to build a sprawling theme park that is now known to the world as “the happiest place on earth.”How Does Whole Life Work?
Whole life is an insurance policy that provides lifetime insurance protection with significant guarantees and tax benefits for the policyowner. These guarantees can be viewed as either rates or values. When actuaries design a whole life policy, they begin by determining what rates are going to be guaranteed. Once the guaranteed rates have been set, they are used to determine policy premiums and values. Guaranteed rates and values are based upon conservative assumptions. A mutual life insurance company will then adjust these rates and values to current conditions through the mechanism of a non-guaranteed dividend. Because life insurance is seen as beneficial to the welfare of society, significant tax benefits have been given to it that are not found in other financial instruments.WHAT ARE THE GUARANTEED RATES?
A whole life policy is built upon a foundation of three guaranteed rates:- The guaranteed mortality rate –this guarantee comes from the 2001 CSO table, a table of guaranteed mortality rates that are required by insurance regulations.
- The guaranteed interest rate – this rate for Auto-Owners policies is 4.0% for the entire life of the policy.
- The guaranteed expense factor – an allocation for expense that is covered in guaranteed values.
WHAT ARE THE GUARANTEED VALUES?
The three guaranteed rates are combined in an actuarial formula that results in three guaranteed values, and it is this trio of guaranteed features that sets whole life policies apart from all other types of financial instruments. Whole life insurance has:- A guaranteed level premium – The annual premium is contractually guaranteed to never change
- A guaranteed death benefit – The level death benefit is contractually guaranteed never to go down
- A guaranteed cash value – The contractually guaranteed cash value grows each year until it is equal to the face amount of the policy at a specified age, usually age 121. (Prior to the 2001 CSO table, it was age 100.)
Dividends
Whole life offers the ability to provide value in excess of its guarantees through dividends. Dividends are paid to the policyholders if declared by the Board of Directors. When dividends are declared, they have three components:- The insurance company’s current investment rate in excess of the guaranteed rate promised in the policy;
- Mortality experience which is better than that which is guaranteed in the policy; and
- Expenses of policy administration which are less than the cost guaranteed in the policy.