# 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.”