Traditional life insurance, also called whole life, provides coverage for your entire life, with a guaranteed amount for your survivors, at a premium that remains the same. You also build up "cash value" with such a policy, an amount you can borrow against if you need money for some emergency. It once was the most common type of life insurance and has retained its appeal for many people because of its simplicity.
Premiums Are Averaged
You can buy traditional life insurance at any age, but the younger you are when you buy it the lower the premiums will be. Insurance premiums increase with age, but whole life rates are leveled out, so you actually pay a bit higher in younger years but proportionately less as you age so the premium doesn't change.
What does change in traditional life insurance is the cash value. This builds up each year you have the policy. The death benefit doesn't change, however. Say you bought a $100,000 policy 10 years ago. You now have perhaps $10,000 in cash value. Technically, your premium now buys you only $90,000 of insurance, but the cash value is added to the insurance at death so the benefit remains $100,000.
Cash Value Benefits
An advantage of cash value is that you can borrow against it if you need cash for an emergency. The loan amount will be deducted from the death benefit if you die before it's paid back. Your cash value can actually grow to equal or exceed the face value of the policy, but that usually happens only at the policy's maturity date which likely is age 95 or 100. If that happens, your beneficiaries will get the full amount of the cash value, which may be more than the policy total.
Some traditional whole life policies also offer dividends, returns on investments made by the insurance company. Not all policies contain this option, and even those that do usually do not guarantee dividends, because investment income can vary from year to year. Any policy dividends aren't taxable as income, because they're considered a refund of your premiums.
- New York Life: Even Non-Traditional Families Need Traditional Life Insurance
- American Institute of CPAs: Traditional Whole Life Insurance
- American Institute of CPAs: How Traditional Whole Life Insurance Works
- Mutual of Omaha: Three Types of Whole Life Insurance Policies
- Met Life: Whole Life Insurance
Bob Haring has been a news writer and editor for more than 50 years, mostly with the Associated Press and then as executive editor of the Tulsa, Okla. "World." Since retiring he has written freelance stories and a weekly computer security column. Haring holds a Bachelor of Journalism from the University of Missouri.