An Introduction to Ordinary Level Premium Whole Life Insurance

Whole life insurance, as the name implies, is a contract designed to provide protection over the insured’s entire lifetime. There are many types of whole life policies, but the oldest and still the most common type of whole life policy is ordinary level premium whole life insurance, or simply ordinary life. This form of insurance is also known as “straight life,” “traditional whole life,” or “continuous premium whole life.” If the term “whole life” is used alone, it is generally accepted that the reference is to ordinary level premium whole life as opposed to any other type of lifelong policy.

This type of contract features level or fixed periodic premiums computed on the assumption that the policyowner can retain the policy for the life of the insured. The death benefit remains level throughout the lifetime of the contract. Insurers invented the level premium concept to make the whole life contract affordable for as long as the policyowner decided to keep it.

As an outgrowth and natural byproduct of the fixed and level premium, the whole life contract develops cash values. These values result from the reserve the insurer needs to accumulate in the early years of the policy’s life so that they will have sufficient money (together with interest earned on the reserve) in later years to pay the promised death benefit while keeping premiums level. Absent this reserve, the level premium would be insufficient to pay the increasing mortality costs as the insured ages. The policy contains a fixed and guaranteed schedule of the cash values that the policyowner may borrow for any reason (such as an emergency or opportunity) at any time or take upon surrendering the contract.

The policyowner agrees to pay a fixed or level premium at regular intervals for the rest of the insured’s life (generally only up to age one hundred, if the insured lives that long, or in some cases, to age ninety-five). In return, the insurance company agrees to pay a fixed death benefit when the insured dies if the policyowner has continued to pay the premiums. Policyowners who discontinue paying premiums and terminate their policies are entitled to the scheduled cash surrender value.

Reproduced with permission.  Copyright The National Underwriter Co. Division of ALM

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