Whole life insurance is a form of insurance that provides protection for the whole of the life insured’s life, not just for a specific term. Whole life insurance is a form of permanent insurance with a fixed or level premium that is usually payable for the entire lifetime of the insured. The terms whole life, straight life, and ordinary life are often used interchangeably.

Premiums can be paid on a continuous basis over the insured’s lifetime or on any limited basis, such as a single payment, or annually (or monthly, or quarterly, for example) for a stipulated period of time, such as 10 years, or until the life insured’s age 65. Whole life policies establish the premium rate when the policy is purchased, and the rate is usually guaranteed not to increase for the life of the contract.

The actual cost of insurance increases with age and eventually becomes prohibitive at advanced ages. In most instances, this rising cost would pose a problem for those who wish to maintain insurance coverage for their entire life. To alleviate this, whole life insurance spreads the cost of insurance over the life of the policy by using a level or fixed premium.

In order to allow a level premium for the life of the policy, the premium payments in the early years exceed the amount required to pay for the pure risk of death (mortality costs) and the expenses of the insurer in a given year. Effectively, some of the insurance costs associated with the life insured’s later years are prepaid or pre-funded in the early years. This pre-funding gives rise to what the actuary refers to as the policy reserve and what the Income Tax Act refers to as the accumulating fund of the policy. In later years, the actual annual mortality cost of policyowners will exceed the level premiums they pay and the shortfall will be withdrawn from the policy reserve. The policy reserve is often incorrectly considered to be the insurance company’s profits.

What is Guaranteed whole life insurance?
Guaranteed whole life insurance includes a guarantee that the face value of the policy and the premium charged will not be subject to change. The insurance company is responsible for any potential shortfall if, for example, it experiences higher than anticipated claims or lower than anticipated investment income in a given year.

What is Adjustable whole life insurance?
In contrast, adjustable whole life insurance does not guarantee the future premium levels or the face value of the death benefit. Essentially, the policyowner shares in the potential benefits and the potential risks that may take place as a result of changes in the pricing factors.

With adjustable whole life insurance, the contract typically specifies that the premium will be adjusted every five years to reflect any variations between actual and projected pricing factors, such as mortality costs and the insurer’s expenses. Most importantly, interest rate trends and their impact on investment income are analyzed. If interest rates are rising, the policyowner’s premium is reduced. Conversely, if interest rates decline, the policyowner either pays a higher premium or maintains the same premium but is provided with a reduced amount of insurance coverage.

A guaranteed policy carries a higher premium cost, since the insurance company is assuming not only the mortality risk, but also the risk of low investment rates in the future.
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Hi, I am A J Bharj ,a well reputed established and experience insurance agent/ broker at Toronto Canada , i would like to share my experience and expertise with you in the form of articles.