Traditional WL is so named because premiums are payable for the insured’s whole life, though as discussed below, the policyholder may not have to make out-of-pocket premium payments for the duration of the policy. The product offers a fixed premium that may be level or modified, a guaranteed cash value and a guaranteed death benefit.
Key to the whole story of WL is that as long as the insured pays the premium, the risk that the guarantees might not be met is borne by the carrier. WL is designed to “endow;” that is, the premium is set to cause the policy’s guaranteed cash value (unbuffered by dividends) to equal its guaranteed death benefit at age 121 (or thereabouts). The buyer has no say in the determination of the premium.
A participating WL policy might pay dividends. Dividends reflect the fact that the carrier had a better investment return, better mortality results, better persistency and lower expenses than the conservative assumptions made in determining the fixed, guaranteed premium. Thus, the dividend is merely a refund of the overcharge represented by the fact that the premium is set at the conservative guarantees, but the company’s results are determined by much more favorable current experience. Dividends aren’t guaranteed, either as to amount or even if they’ll be paid at all. If paid, dividends can be applied in several ways, but are most commonly used to purchase paid-up additions, reduce the premiums or pay the policy owner in cash. Paid-up additions are small single premium policies purchased at net rates. Paid-up additions are themselves participating, so they generate cash value and death benefit above those guaranteed by the policy.
As noted, premiums are contractually payable for life. However, under some sort of so-called “vanishing premium” or “quick pay” scenario, an illustration may show them as payable for some shorter period. Regardless of what the outlay column in the illustration shows, the premium never actually goes away—it’s just being paid out of policy values. Whether and when the policy will ever become self-sufficient in this fashion is a matter of pure conjecture. Indeed, vanishing premiums could reappear if the carrier’s dividend scale drops sharply enough to require more cash contributions from the policyholder.
