Whole Life Insurance

• Fixed premiums; they never change
• Fixed death benefit; It never changes
• Has cash values
• Fixed interest rate on the cash values; It never changes
• Loans against the cash values may be made
• Insurance company invests the cash value; they take the risk of guaranteeing the cash value interest rate
• They mature/endow at age 100 (the cash value equals the face amount)

MR. WATSON: A guy came along many years ago, a pretty smart guy, and he said, "I need insurance that lasts my whole life." So what kind of policy does he need?

STUDENTS: Whole life.

MR. WATSON: Very good. Whole life insurance . How long does it last?

STUDENTS: Whole life.

MR. WATSON: For statistical purposes only, everyone is considered to be dead by age one hundred? 100. So, whole life policies last until age 100. If the insured reaches age 100 the policy-owner would receive the full face amount. The policy is then said to "endow" or "mature."

STUDENTS: Huh?

MR. WATSON: Part of each premium goes toward the death benefit and part of the premium goes toward the cash value. This cash value earns interest, so it increases each year. When the cash value equals the death benefit, at age 100, the policy is said to "endow" or "mature." This happens with whole life at age 100. They send the old codger the cash value, which would equal the death benefit. The policy is over. It has "matured" or "endowed." If the insured dies anytime before age 100, we pay the beneficiary.  If the insured is 100, we pay the policy owner.  Either way, the benefit is ALWAYS tax-free.

MR. WATSON: Whole Life insurance will have a higher premium than term insurance for the same age. Term is similar to renting, whole life is like owning.

MR. WATSON: Let's take someone at age 25. The premium for a term life policy might be $200. For the whole life policy the premium might be $1000. So the insured is over-paying for the whole life, in this case, $800. But, the term policy premium is going to go up. The whole life premium will not, it always stays the same. In the future, at some point, the premium for the whole life will be lower than the term. You over-pay for whole life in the early years and under-pay in the later years.

MR. WATSON: Part of this over-payment of $800 is going into the policy's cash value and is earning interest.

MR. WATSON: An example: I have a $100,000 whole life policy to be paid to my beneficiary when I die. And, through the years I have generated cash value of $10,000. Upon my death my beneficiary will receive $100,000, not $110,000. The cash value is "part of" the death benefit, not in addition to.

A note: Other policies will allow you the choice of both, the death benefit and the cash value, but they will be more expensive. You'll see.

MR. WATSON: May I, the policyholder, take that money out? (Getting ahead of ourselves here, a bit)

STUDENTS: Yes.

MR. WATSON: Be careful with that answer.

MR. WATSON: Can I borrow out of my policy?

STUDENTS: No, you borrow against your cash value..

MR. WATSON: I can borrow against it. I'm borrowing from the insurance company and using my cash value as collateral. I am NOT borrowing my own money. If I want to borrow money from the bank and let's say I have $10,000 in my savings account. I will use my money in the bank as collateral. My money is still in the bank. Same thing here.

MR. WATSON: Will the bank lend me money out of my savings account? No. They are going to lend me their money, the bank's money, and use my savings account as collateral. My money is still in the bank earning interest, isn't it? Y'all agree?

STUDENTS: Yes.

MR. WATSON: Again, do I borrow out?

MAN: No.

MR. WATSON: I borrow against it. Does the insurance company lend you your own cash value? No. They lend you their money, the insurance company's money. That is why they charge you interest to borrow against the cash value. The money in your bucket is just what?

ALL: Collateral.

MR. WATSON: You got it.

MAN: I was wondering, you can take out your cash value without borrowing it. Right?

MR. WATSON: No, you'd have to cash the policy in. Borrow against the cash value, or cash the policy in.

MAN: So you got money as a loan, but if you died-

MR. WATSON: Hold on, we're getting there.

MAN: Okay.

MR. WATSON: Do I have to pay it back when I'm living?

STUDENT: Yes, you're supposed to.

MR. WATSON: No, you do not. But what happens if you die without having paid back the loan, Kamikaze? You borrow the thing but you die the next day.

MAN: They will subtract the loan from the payout plus any interest on the loan that was owed.

MR. WATSON: Exactly.

 

Review

MR. WATSON: Does whole life have cash values?

STUDENTS: Yes.

MR. WATSON: Does term have cash values?

STUDENTS: No.

MR. WATSON: What distinguishes whole life from term is cash value. Do you agree?

STUDENTS: Yes.

MR. WATSON: And whole life matures at age 100. It endows at age 100. Gator (addressing a student), look, the cash value is earning interest and growing & growing & growing. At age 100, the cash value in a whole life policy equals the death benefit, the policy has matured or endowed. At that time, they give you, the policy-owner, the death benefit.

GATOR: If you are alive.

MR. WATSON: Yeah. What are you going to do with it? Buy a new motor for your chair?

(Laughter.)

MR. WATSON: Whole life policies have cash value and they endow at age 100.

MR. WATSON: Unique features of whole life are

• cash values and
• maturity at age 100.