Methods of Paying for Whole Life

GATOR: How do you pay for whole life?

 

Straight Whole Life

MR. WATSON: Good question. Several ways. One way is called "straight whole life." Take a guy my age, 30 years old, pay premiums all the way up to age 100. Like a straight line. All the way up to age 100. You are going to pay the premiums for $100,000 of insurance, pay it his entire life, in this case, up to 70 years. Do you agree? $1,000 premium, per year.

 

Limited Pay Whole Life

MR. WATSON: Now take someone the same age & sex. He only wants to pay it for 20 years (a 20-pay life), up to age 50. It's a limited pay life . In this case, we call it 20-pay life. You can have a 10-pay life, etc... (Pay premiums for a limited time but still have the insurance until age 100.)

MR. WATSON: His premiums would be $1,800 per year. Whole life paid up at 65, when would it be paid up?

ALL: 65.

MR. WATSON:  When does the policy mature?

MAN:  65.

MR. WATSON:  No, it’s whole life, so it matures at 100.  Be careful.  He’s paid-up at 65, so he’s done paying premiums.  But he’s still covered to age 100, so it matures at 100.  

 

Single Premium Whole Life

MR. WATSON: Or take another guy my age. Single premium whole life insurance for $18,000. The premium is $18,000 paid one time and he’s immediately paid-up. How many times would you pay on that? Once. Which one of those has the highest premium?

WOMAN: Single pay. The highest premium.

MAN: On the single premium, at the time you pay that premium does the cash value mature to $100,000?

MR. WATSON: No. Cash value, if you put in $18,000, how could it be worth $100,000? I would be doing that all day long. Put in $18,000, and I could not take out $100,000.

MAN: I'm confused. Doesn't it grow incrementally with the amount of money you put in?

MR. WATSON: Yeah. You put in $18,000, that's growing a lot faster than putting in $1,000 per year. Guys, when will this policy endow? Age 100. When will a single-paid premium policy endow? Age 100.

MAN: But, it's completely paid for.

MR. WATSON: I think you're misunderstanding. When I say "paid-up policy ," what does that mean to y'all? The policy is paid for, completely paid-up. What does that mean? Do you owe any more? No.

MR. WATSON: When will it endow (See endowment ), when will the cash value inside the policy equal the death benefit?

MAN: Age 100, or death.

MR. WATSON: Right. It is paid up at, say, age 50, but the cash value won't endow until age 100. "Paid-up" and "endow" do not mean the same thing.

MR. WATSON: Which one has the most cash value 5 years into the contract?

STUDENTS: Single premium.

MR. WATSON: Right. The shorter the payment period, the higher the premium, the quicker the cash value grows, just like a mortgage. Yes or no?

STUDENTS: Yes.

MR. WATSON: The amount of a policy's cash value depends upon a variety of factors, including:

• the face amount of the policy,
• the duration of premium payments, and
• how long you have had your policy in force. In other words, it works exactly like a mortgage on a home. If everything else is equal, the longer you have had the mortgage, the more equity you are going to have. You agree?

MR. WATSON: The shorter the mortgage payment period, the higher the mortgage payments, the quicker the cash values grow. Everybody agree?

MR. WATSON: Mature or endowed. They mean the same thing. What does "maturity value " mean? It means the cash value does what? It equals the death benefit.

 

More Review

MR. WATSON: Let's say we have a death benefit or face amount of $100,000. We have cash value of $10,000. The cash value is growing with interest, and it keeps growing, and at age 100 they are equal. At that time they give you the bucket. When Rose K., who had $1,000,000 policy, reached age 100, they gave her a check, tax-free, for $1 million.

MR. WATSON: Can we agree that the cash value could be considered living benefits? Can I borrow that money against my policy? Can I send my kids to college with it? Can I go to Europe with it?

ALL: Yes.

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

STUDENTS: No.

MR. WATSON: If I don't pay it back, they will subtract the loan from the death benefit with interest.

MR. WATSON: To whom do the cash values belong?

STUDENTS: The policy owner.

MR. WATSON: Right. Not necessarily the insured. The insured and the policyowner can be two different people. One spouse buys the policy on the other spouse. Do you agree?

STUDENTS: Yes.

MR. WATSON: This is a review question. How can we keep a premium level for a guy my age all the way up to age 100?

WOMAN: Over-payment at the beginning. Whole life.

MR. WATSON: Then later on when the premium should be high, you are-

WOMAN: Underpaying it.

MR. WATSON: So you overpay in the early years. Then in the later years when the premiums should be sky high, because you have been overpaying it, you are actually underpaying it.

MR. WATSON: To put it simply, the premium amount is calculated so that in early years, it's more than what is necessary to meet anticipated claims and expenses and is less than adequate in the later years when the claims will likely be paid. Does that make sense?

MR. WATSON: Next, Straight Whole Life. How long do you pay on straight whole life? To age 100. How about limited pay whole life? If I have a 10 pay whole life, how long do you pay on it? Ten years. Single payment whole life. How about that? One time.