WHOLE LIFE INSURANCE

A popular policy with a fixed monthly payment is the so-called whole life policy. There are so many variations on how this can be structured that I can’t possibly cover them all. I’ll look at a 20-year-old typically healthy man and present one pos­sible scenario. You should get the idea of what’s going on pretty easily and be able to understand different variations when they’re put before you.

As was shown above, for a 20-year-old man, a year’s $100,000 1-year term insurance should only cost $127. Suppose, however, that this man pays $900 a year instead. I’ll treat things annually even though payments are usually made monthly, just to keep the table showing these calculations from becoming uncomfortably long.

At the inception of the policy (our young man’s twentieth birthday), he writes a check for $900. A total of $127 goes to buy him a $100,000 term life insurance policy for the year. The remaining $773 goes into a savings/investment account. If we assume that this account earns 4% a year, then on his twenty-first birthday, he has (1.04)($473) = $804. On this day, he makes another payment (of $900), and the insurance company takes the required payment for the year’s term insurance ($136) out of the account, leaving the account with a balance of $1,568. As we continue this procedure, year after year, the balance in the account grows—even though the annual 1-year term policy payment is also growing (Table 10.5). Note that I didn’t

Table 10.5 Whole Life Insurance Policy Example

Age

q

l

d

Premium ($)

Payment ($)

Balance ($)

20

0.001266

100,000

127

126.60

900.00

773.40

21

0.001360

99,873

136

135.85

900.00

1,568.49

22

0.001419

99,738

142

141.52

900.00

2,389.71

23

0.001435

99,596

143

142.90

900.00

3,242.39

24

0.001419

99,453

141

141.08

900.00

4,131.00

25

0.001390

99,312

138

138.04

900.00

5,058.20

26

0.001365

99,174

135

135.39

900.00

6,025.14

27

0.001344

99,039

133

133.14

900.00

7,033.01

28

0.001336

98,905

132

132.13

900.00

8,082.20

29

0.001341

98,773

132

132.44

900.00

9,173.04

30

0.001352

98,641

133

133.35

900.00

10,306.62

31

0.001371

98,508

135

135.02

900.00

11,483.86

32

0.001408

98,373

139

138.52

900.00

12,704.70

33

0.001469

98,234

144

144.28

900.00

13,968.61

34

0.001553

98,090

152

152.29

900.00

15,275.06

35

0.001653

97,937

162

161.86

900.00

16,624.20

36

0.001770

97,776

173

173.04

900.00

18,016.13

37

0.001911

97,603

187

186.54

900.00

19,450.24

38

0.002075

97,416

202

202.11

900.00

20,926.13

39

0.002254

97,214

219

219.11

900.00

22,444.06

40

0.002438

96,995

236

236.44

900.00

24,005.39

41

0.002632

96,758

255

254.65

900.00

25,610.95

42

0.002853

96,504

275

275.33

900.00

27,260.06

43

0.003113

96,228

300

299.60

900.00

28,950.86

44

0.003412

95,929

327

327.28

0.00

29,781.62

45

0.003735

95,601

357

357.03

0.00

30,615.86

46

0.004071

95,244

388

387.73

0.00

31,452.77

47

0.004428

94,857

420

420.06

0.00

32,290.82

48

0.004806

94,437

454

453.89

0.00

33,128.57

49

0.005206

93,983

489

489.31

0.00

33,964.40

50

0.005648

93,493

528

528.01

0.00

34,794.97

51

0.006121

92,965

569

569.05

0.00

35,617.71

52

0.006594

92,396

609

609.22

0.00

36,433.20

53

0.007045

91,787

647

646.64

0.00

37,243.89

54

0.007488

91,141

682

682.49

0.00

38,051.15

55

0.007946

90,458

719

718.75

0.00

38,854.45

56

0.008459

89,739

759

759.10

0.00

39,649.54

57

0.009064

88,980

807

806.55

0.00

40,428.97

58

0.009810

88,174

865

864.95

0.00

41,181.18

59

0.010706

87,309

935

934.75

0.00

41,893.67

60

0.011763

86,374

1,016

1,016.03

0.00

42,553.40

Table 10.5 Continued

Age

q

l

d

Premium ($)

Payment ($)

Balance ($)

61

0.012934

85,358

1,104

1,104.01

0.00

43,151.53

62

0.014159

84,254

1,193

1,192.98

0.00

43,684.61

63

0.015362

83,061

1,276

1,276.01

0.00

44,155.98

64

0.016558

81,785

1,354

1,354.16

0.00

44,568.06

65

0.017847

80,431

1,435

1,435.42

0.00

44,915.36

66

0.019331

78,995

1,527

1,527.05

0.00

45,184.93

67

0.020992

77,468

1,626

1,626.23

0.00

45,366.10

68

0.022858

75,842

1,734

1,733.58

0.00

45,447.16

69

0.024921

74,109

1,847

1,846.84

0.00

45,418.21

70

0.027065

72,262

1,956

1,955.77

0.00

45,279.17

71

0.029363

70,306

2,064

2,064.39

0.00

45,025.94

72

0.032031

68,242

2,186

2,185.85

0.00

44,641.13

73

0.035178

66,056

2,324

2,323.71

0.00

44,103.06

74

0.038734

63,732

2,469

2,468.61

0.00

43,398.57

75

0.042414

61,263

2,598

2,598.44

0.00

42,536.08

76

0.046171

58,665

2,709

2,708.61

0.00

41,528.91

77

0.050325

55,956

2,816

2,816.02

0.00

40,374.05

78

0.055085

53,140

2,927

2,927.22

0.00

39,061.79

79

0.060498

50,213

3,038

3,037.80

0.00

37,586.46

80

0.066557

47,175

3,140

3,139.83

0.00

35,950.09

81

0.072986

44,035

3,214

3,213.97

0.00

34,174.13

82

0.079682

40,821

3,253

3,252.73

0.00

32,288.36

83

0.086593

37,569

3,253

3,253.19

0.00

30,326.70

84

0.094013

34,316

3,226

3,226.10

0.00

28,313.67

85

0.102498

31,089

3,187

3,186.59

0.00

26,259.62

86

0.111640

27,903

3,115

3,115.08

0.00

24,194.93

87

0.121472

24,788

3,011

3,011.03

0.00

22,151.70

88

0.132023

21,777

2,875

2,875.03

0.00

20,162.73

89

0.143319

18,902

2,709

2,708.97

0.00

18,260.27

90

0.155383

16,193

2,516

2,516.07

0.00

16,474.61

91

0.168232

13,677

2,301

2,300.85

0.00

14,832.74

92

0.181880

11,376

2,069

2,069.04

0.00

13,357.01

93

0.196334

9,307

1,827

1,827.23

0.00

12,064.06

94

0.211592

7,480

1,583

1,582.61

0.00

10,964.02

95

0.227645

5,897

1,342

1,342.40

0.00

10,060.17

96

0.244476

4,555

1,113

1,113.47

0.00

9,349.11

97

0.262057

3,441

902

901.75

0.00

8,821.33

98

0.280351

2,539

712

711.90

0.00

8,462.28

99

0.299312

1,827

547

546.96

0.00

8,253.81

100

1.00000

1,280

1,280

1,280.44

0.00

7,303.52

have to do any present value corrections to the premiums because they are being taken from the savings account on the day they are due.

After the annual payment at age 43, the policy is declared “paid off,” and no further $900 payments are needed. The balance in the account still continues to grow because the annual interest outweighs the insurance policy payment, until age 68, when the term insurance premiums get large enough to outweigh the accruing inter­est. At age 100, if our young man lives that long, there is a balance in the account of approximately $7,300.

At the time of death, whenever that may be, the insurance company pays the beneficiaries the $100,000 face value of the policy and also the balance in the account.

This type of policy is attractive to many people for several reasons:

1. At age 47, the policy is “paid off’ and no further premium payments are required.

2. Upon death, the beneficiaries get both the value of the life insurance policy and the balance of the account, the latter possibly being quite substantial. For example, if our young man dies at age 65, there is almost $65,000 in the account.

3. This policy has a “cash value.” At any time, the young man can cancel his policy and walk away with the balance in the account.

4. Sometimes an insurance company will offer a low interest loan to the policy owner, secured by the cash value in the insurance account. This is worth taking a minute to think about because even though the interest rate is low, remember that you’re paying interest to get the use of your own money!

A real insurance company has operating expenses and needs profits. Also, the money being held is invested, and things can go from very well to very poorly. The insurance company is investing our young man’s money, and all he can do is hope that it is investing wisely while keeping a close watch on its costs. And again, there are Life Tables that are much more specific and closely tailored to the statistics that pertain exactly to you—sex, race, medical history, and so on. Someone with a par­ticularly dangerous career or someone with a serious congenital heart defect prob­ably can’t get life insurance, and a table that reflects these considerations will look considerably different from a table that includes “all comers.”

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