Under whole life insurance, the premium would be more than enough to cover the risk; the difference would be invested to form policy reserves, to subsidize what would otherwise be an inadequate premium in the later years: This concept still remains the basis for calculating premiums for all permanent insurance contracts.
If a policy owner decides to terminate a permanent insurance policy, the insurance company will return to the policy owner an equitable share of the accumulated policy reserve, called the policy’s cash surrender value and the insurance company is released from its future obligations under the contract.
Although cash surrender value is guaranteed and stated in the policy, in the 1st and 2nd years, a cash surrender value usually is unavailable, because the cost of putting the policy into force more than offsets any cash surrender value , and the period is too short for the company to earn enough interest on the premiums to compensate for these costs and in subsequent years, the cash surrender value may be less than the policy reserved for a number of reasons:
a) The government sets standards for policy reserves that may result in the required reserve being higher than what the company accumulate from the premium charged.
b) Expenses, which the company incurs when the policy is issued.
In the case of whole life policies, the policy reserve increases from year to year as the life insured gets older, at very advanced ages in most policies equals the sum insured.
With a whole life insurance policy, premiums are payable at the same amount each year from the date the policy is issued until the life insured dies, unless the policy owner wishes to discontinue paying premiums and surrenders the policy for its cash value, or takes extended term or reduced paid-up insurance.
Whole life insurance is especially useful where there is a need for lifetime protection against financial risks, such as retirement expenses, final expenses and for the maintenance of dependents, if the policy owner dies before reaching retirement age.
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