If you decide on buying whole life insurance, you will come across many terms which are associated with whole life insurance. These terms can be confusing. Before you take a decision, you must understand these terms and their meanings.
One term that you will always hear when you talk about whole life insurance is dividends. Dividends are money paid back from a premium. The insurance company will pay out a dividend for a number of reasons. Generally dividends are the money left over after the fees, charges, and investment goals have been met for the policy in a given period. Insurance companies will always tell you that they will pay you “X” amount as death benefit. Death benefit is the money your beneficiary receives upon your death. In most policies, the death benefit is guaranteed and often supplemented by investment income overtime. Premium is the periodic or one time payment which you pay to the insurance company to keep your insurance policy valid. Some policies have intermediate or adjustable premium. In such policies, the premium can be calculated based on a number of factors. These usually include mortality estimates and investment projections. Most of these plans have a limit that the premium cannot exceed. Another type of premium is the level or fixed premium. In a policy with level or fixed premium, the premium is slightly higher in the initial years of the policy but never goes up. The extra money paid at the beginning is used to cover the cost of the policy in later years. You can also get polices with limited premiums where the premiums are only required for a few years. The policy still covers the insured for life, but they only have to pay a certain number of premiums. There are also single premium policies where you have to pay only one premium but this amount can be rather large. For this reason, the premiums are much higher than in other whole life insurance plans.
Generally there are two types of whole life insurance policies: participating and non participating. A participating policy has cash value and earns dividends if the life insurance company performs efficiently, but dividends are not guaranteed. A non participating policy has cash value. It does not pay dividends. If you keep a whole life insurance policy for a specific period of time, the policy will build up guaranteed cash values which pay a guaranteed interest rate each year accumulating a considerable sum over time.
