Whole life insurance is a form of permanent life insurance which covers you throughout your entire life, rather than for a limited term (as is the case with term life insurance). This means that as long as premiums are paid, you will remain insured until the day you die – even if you die at a ripe old age. In Switzerland, whole life insurance policies are normally based on the pillar 3b category of retirement savings.
A whole life insurance policy has both a face value and a cash value. The face value communicates the benefit to be paid out in the event of death. The cash value communicates the policyholder’s equity in the policy.
The holder of a whole life insurance policy pays and additional premium above the premium for the actual life insurance coverage. This additional premium builds the cash value of the policy. Typically, the insurance company pays interest on a policy’s cash value. In the case of participating whole life insurance, the insurance company may also pay out dividends which can be used to build a policy’s cash value. Non-participating whole life insurance policies do not benefit from dividends.
The cash value of a policy serves to cover part of the death benefit – allowing the insurance provider to make a profit while still providing lifelong life insurance. Because the cash value of a whole life insurance policy grows over time, the longer the policyholder lives and pays premiums, the larger a part of the death benefit is covered by the policyholder’s equity in the policy (cash value). Therefore, the smaller the portion of the death benefit which the insurance provider has to cover.
Whole life insurance policies typically have a maturity date. This is the date on which the cash value of a policy becomes equal to its face value, or to a predetermined percentage of the face value. Whole life insurance policies typically mature between the ages of 90 and 100. Typically, you are relieved from paying premiums once your policy matures (if you live long enough) because you have full equity in the policy and therefore are literally paying your own death benefit.
At the age of 40, you take out a whole life insurance policy with a face value (death benefit) of 400,000 Swiss francs. The policy has a 1% annual interest rate and matures when you reach the age of 100. In addition to administrative fees and the premiums for term life insurance, you would have to pay approximately 4850 Swiss francs in premiums every year in order for the cash value of the policy to match its face value (400,000 francs) by the maturity date.
If you die at the age of 90, the cash value of your policy will cover approximately 315,770 francs of the 400,000 death benefit – more than three-fourths. The insurance company would pay out the cash value plus the remaining 84,230 francs. If you lived to be 100 years old or older, the full death benefit would be covered by your savings (the cash value).