The Whole Life Investment

How much will you have to pay into that whole life policy over and above what you would pay for an equivalent amount of term life insurance?

Once you know the nature of the investment within the whole life contract and the risk-reward relationships involved, you will want to know how much of an investment you will be required to make in the policy in addition to what is required to pay the mortality and expense charges.

Whole life insurance is a fixed-premium product. You give the insurance company your age, sex, and risk information, and the company gives you a stated level premium for the premium paying period selected. The stated premium is billed to you each year (or for the period selected). The company cannot increase the premiums, and the only way you can reduce the cash-flow into the contract is to take some of the investment results out either through the use of dividend credits, if this is a participating insurance policy, or through policy loans.

This inflexible premium requirement is an important consideration in the financial planning process. Obligatory premium payments can be a problem during periods of unemployment or of high expenses. A second important element is the fact that the policy owner does not control the investment vehicle in a whole life contract. The insurance company selects the long-term bonds and mortgages and continues to invest and reinvest in the assets selected by its portfolio managers.

If you decide that you don't like that particular investment, you have few alternatives. You may borrow on the policy, or drop the policy and thus lose whatever life insurance has been provided. If you surrender the contract, you can expect to pay ordinary income tax on any accumulated gain, that is, any amount you receive back over what you have paid in. The net after-tax results are then available for you to reinvest elsewhere.