2022 AFBA Financial Planning Guide

disadvantage is higher premium costs. In fact, because of their higher premium costs, limited-payment policies are not well suited for those who want permanent insurance and whose personal circumstances require a high level of protection at a time when their income level is relatively low. The insurance needs of people in this category are better served through an ordinary life or term insurance program. Limited-payment whole life is designed for those individuals who already have enough insurance in force to protect against income loss, but who are seeking additional insurance that will also provide a supplement to their personal savings or retirement plan. Another type of whole life policy is called single-payment whole life. With this type of policy, insurance is purchased through a one time cash payment made at the beginning of the insurance contract. This is different from ordinary life and limited pay life which provide for the payment of premiums on an installment basis over an extended period of time. An advantage of a single-payment whole life program is the immediate availability of substantial cash and loan values. Since the single premium cost is relatively expensive, these programs are generally of limited usefulness in the life insurance plans of most families. However, the investment attributes of these programs may make them useful for those individuals who are looking for a tax sheltered investment vehicle which simultaneously provides a degree of insurance protection. So what is the bottom line on whole life? The biggest advantage of whole life is that these policies provide protection and allow the accumulation of an estate regardless of how long the insured lives. If he or she dies prematurely, the value of the policy will be paid to the

constant over the life of the insured. In addition to providing death protection, whole life policies contain a savings feature called cash value. The idea behind cash value is to provide the insured with some type of tangible benefit while they are alive in return for the insurance premium charges they are paying. The benefit is in the form of a savings program which generally carries a guaranteed minimum level of interest return. Consequently, the cash value of a policy will build up over time. Since the actual cost of insurance increases with age, the buildup of cash value is also used to fund these increased charges later in the life of the insured. Based upon the duration of the premium payments, there are three types of whole life insurance — ordinary, limited payment, and single payment. Under ordinary life (also called straight life) policies, level premium payments are made on a periodic basis over the life of the insured. The earlier in life the policy is started, the lower the periodic payments will be. However, all things being equal, the earlier you start the coverage the greater will be the total payments that you make into the policy. Of the various types of whole life policies available, ordinary life offers the most death protection and the least savings buildup. Consequently, most insurance advisors agree that when death protection is the principal objective, the ordinary life policy represents the best choice for families who are filling their permanent insurance needs. Limited-payment whole life also provides insurance coverage over the life of the insured. However, it schedules level premium payments for a specified period, generally 20 or 30 years. These are called 20 payment or 30 payment whole life policies. One advantage of limited-payment policies is a faster buildup of the policy’s cash value feature. A


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