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What exact is whole life insurance, and how do life insurance companies profit from selling it?

Agents are always extremely keen about selling my family whole life insurance instead of term. According to the agents, whole life is preferable to term since it does not expire and as a result the beneficiary is guaranteed some payment upon the death of the insured. However, why would the insurance company profit from such a setup if they are bound to pay back an amount that is at least equal to the total amount paid? I have tried to do some research on my own, but I still can't seem to fully understand this matter. Any help will be greatly appreciated!

Public Comments

1. The premium on whole life is substantially higher than the premium on term life. However, whole life builds cash value. Fortunately for the insurance company, the policyholder gets screwed on the cash value component. It's generally cheaper for someone to buy term insurance and then save/invest the difference in premium between term and whole life insurance.
2. A good question, and you are very, very smart to be wary of the whole life insurance pushers. You are unusually perceptive, too (or highly intelligent about math and numbers) in that you realized on your own that the numbers they were telling you didn't make sense--that you were only getting back what you put into it (or less) from these whole-life policies. They in truth are more like bad savings plans than real insurance. Term insurance is 'real' insurance--you only pay for it for 20 or 30 years to protect your young loved ones financially--your young children and young spouse--should you die unexpectedly and they lose your income. We had it for 20 or 30 years, while our children were growing up. Now we no longer have it. But we don't need it--the kids are financially on their own (well, almost), and we've built up equity on our own to take care of our own needs. My husband is an engineer/mathematician--those insurance guys couldn't pull the wool over his eyes--but did those insurance vultures ever stop circling over us trying to convince us 'theirs' was the better way? Never. BTW always, always be suspicious of those 'free dinners' thrown by insurance companies. We NEVER go to those things. Tell those insurance hawks to go to .... AND WARN OTHER PEOPLE, your friends and loved ones, to stay away from those bloodsucking insurance agents too. People are often very vulnerable and trusting and easy to talk into things. I don't know why schools don't teach children about life insurance and how to add up numbers the same way you did. There oughtta be a law.... But KUDOS to you for your smart thinking--you have spared your family from being sucked into a bad deal.
3. In short Term insurance - Premiums are cheaper. You pay for the protection and get nothing back unless something happens to the insured. Whole life insurance - Premiums are higher. Same protection as term. You will be able to get back some money when the policy matures in maybe 20, 30 years time. However, if you do your calculations and do the compounding, the returns are not really that high after taking into consideration of inflation. And the fact that the insurance company would have used the premiums that you paid for the last 20-30 years to make more money for themselves. The premiums collected by the insurance companies are invested in stocks, mutual funds, property, etc. Just look at AIG and you will have an ideas. Having said that, if you have no idea on how to better invest your money and don't intend to learn. I guess buying insurance is a better option than putting money in a bank.
4. thanks
5. Perfect, you may see and ask the sources below. Thanks
6. Though there are many reasons to opt for WL, it's not always the best choice. It however is not nearly as bad as some of these "mathematicians" state. They always like to talk about the downside to the cash value. Taking that benefit completely out of the equation, let's analyze another financial decision some of these "mathematicians" make... Do they rent their house for 30 years or do they pay nearly double the rent for a mortgage so they own something when they're done paying? Truth be told, depending on age and policy type, many WL policies won't need another premium payment after 30-35 years if the mortality expenses don't change drastically. You won't necessarily have to pay for your entire life. Back to cash value. The experts, especially our friends at Primerica recommend that you buy term and invest the difference into their mutual funds that have 5% sales charges. At the end of the 30 years, they have no insurance and investments which after taxes are not that much greater than the tax-deferred cash value of a WL policy. Also, they can't touch their investments without penalty until age 59 1/2. Personally, I like knowing that I can pay a couple more years at a much higher premium and KNOW that I'll get SOMETHING back in return. Sort of like owning a home, not renting it.
7. Whole life insurance offers coverage to around the age of 95-100. Premiums remain level throughout the term and it builds cash value. Because of the cash value, premiums are 2 to 5 times higher than term insurance. In the first 2 years of the policy, no cash value is accumulated. After that, you are guarantee an interest of 1-4%. If someday you want to take money out, you have to borrow it and pay loan interest of anywhere between 5-8%. The interest you pay back does not go back into the cash value, but to the insurance company. If you die while there's a loan balance, this amount (plus interest and any missed premiums) will be deducted from the face amount of the policy. If you decide to cancel the policy to get the cash value, surrender charges will apply on the cash value. So in the early years, you may not get any money because surrender charges are very high. If someday you die while the policy is still active (meaning you continue to pay your premiums), the beneficiary will get the face amount of the policy, but all the cash value is kept by the insurance company. So you are wondering how insurance companies profit from it? Several ways: 1) They charge high premiums for it and clients typically pay it for several years. 2) Whole life insurance is similar to a decreasing term policy. In a decreasing term policy, premiums remain level but coverage goes down year after year (its typically sold by mortgage companies). In whole life, while premiums remains level, cash value goes up, but the coverage that has to be paid by the insurance company goes down. For example, lets say you bought a $100,000 policy. In year 10, there's $10,000 in the cash value. If you die, the insurance company only has to make up $90,000. By the time you are 100 years old, the cash value will be near $100,000 and the policy will expire. The insurance company will pay you face amount of the policy (in this example, $100,000) when that happens and take a small loss or a small gain (depending what the value of the cash value is). 3) Many agents and companies prefer to sell whole life over term because of the huge profits and commissions earned from this product.
8. Basically insurance only works when a large groups of people own that particular insurance. Everyone pays to protect their income, but not everyone is going to use their insurance. So that's how basically insurance companies stay in business, unless something extraordinary has happen in this country where there's lots of people are filing for claims and the insurance company can't pay them all (such as the Hurricane Katrina event). What is whole life insurance? 1) Its a level term insurance to a specified age (usually to age 95, 98 or 100) plus cash value. 2) It is very expensive when compared to term insurance 3) Cash value grows at a very low rate of return. In the first 10 years, you see a negative return on your money. But long term average is anywhere between 1-4%, depending on the company. 4) If you want to take money out, you have to borrow it and pay loan interest of 5-8%. 5) If you die someday, the insurance company pay the face amount of the policy (minus loans and missed premiums) to the beneficiary, but they keep all the cash value. 6) If you do get to live by the end of policy date (when you around age 100), the insurance company pay you the cash value, but you lose the insurance. There's only one reason why that agent is trying to sell you whole life insurance: MONEY! Next thing you'll know, that agent would try to sell you universal life insurance, a product that is more horrible than whole life, but it pays out more commissions.