What is Modified Whole Life Insurance?

Wondering, “what is modified whole life insurance?”. It’s similar in some ways to traditional whole life insurance. For example, it is a form of permanent insurance, meaning that it is intended to be kept for a person’s whole life, as opposed to insurance for a temporary need, such as term insurance.

Modified Premium Structure

Unlike traditional whole life insurance in which the premium amount doesn’t change throughout the life of the policy (though the duration might change), modified whole life policies premiums are lower during the initial years of the policy and increase after a set number of years that the policy is in force.

Premiums increasing after the first five to ten years of a policy life is standard, depending upon the company issuing the policy. After the initial term of having premiums that are lower than comparable whole life policies, modified premium whole life premiums increase to a point where they are higher than a whole life policy. The increased premium rate then remains level for the life of the policy.

A Policy Beneficial to Both the Owner & the Insurance Company

One of the advantages of modified premium whole life insurance is both the policyowner and the insurance company benefit from the policy structure.

Modified premium whole life benefits the policyowner by helping them to purchase a permanent life insurance policy at a premium which is more affordable at the time of application. The owner/insured may not want to purchase a low-priced term insurance policy but still needs to have premiums lower than a traditional whole life policy. Modified premium whole life allows them to get the permanent insurance they want at an initial lower rate.

The insurance company benefits from reduced liability. While premiums are lower, the insurance company has less risk of the insured dying. As the statistical risk of the insured dying increases, the insurance company is collecting higher premiums than they would for a traditional whole life policy. This premium structure typically leads to insurance companies being paid more for the same amount of coverage than a whole life policy.

The Face Value Doesn’t Change

Though modified premium whole life’s monthly premiums are lower than a whole life policy during the early years, the face amount remains the same throughout the life of the policy. This is of value to a policyowner who needs a set face amount for a lower premium early in life and can comfortably pay the higher premium in upcoming years.

Cash Value Accumulation

Modified whole life insurance policies accumulate cash value just as traditional whole life policies. Because premiums are lower in the early years of the modified premium policy, cash values will accrue slower than whole life initially and will build faster when the premium amount increases.

Dividends Are Payable

Modified premium whole life policies are eligible for dividends, the same as level premium whole life policies. Because of the lower cash value amount accrued during the early years, dividends will generally be lower initially as well. These dividends can be used for the same purposes as whole life, such as paying premiums, purchasing paid-up insurance, or taking out as income.

Life Insurance Ideal For A First Policy

A modified whole life policy with lower initial premium payments is an ideal policy for a first policy, such as a young married person. They may have a need to protect a spouse or a growing family, but financially they aren’t yet in a position to pay higher premiums as they will be in upcoming years.

Their modified whole life insurance policy allows them to obtain the policy type they want (permanent life insurance) at an affordable rate. As their career progresses, or a spouse provides a second income, they will be able to budget for the increased premium.

Being insurable is also a benefit of applying at a younger age. Statistically, the younger a person is, the more likely they are to be insurable. Insurance company actuaries and premium rates attest to this. A healthy younger person that qualifies for a higher face amount but needs an initially lower premium will find modified premium whole life insurance ideal for their situation.

Perfect for Younger Businesses

Businesses that are start-ups or are in their early stages will also find modified premium whole life beneficial. These businesses often need to use life insurance to fund key-person policies or buy-sell agreements. Because of limited cash flow, modified premium policies allow these needs to be met now, and be affordable in the future.

Purposes of Modified Whole Life Insurance

People purchase modified premium whole life for a variety of reasons. They include:

• Cover burial expenses
• Pay off debt
• College planning
• Accumulate cash value for retirement
• Pay estate taxes
• Diversify investments
• Pay off a mortgage
• Replace lost income
• Business planning

These are some of the reasons people buy modified whole life insurance. It provides benefits for survivors, but also provides benefits the policyowner can utilize while they’re alive, such as having more money for retirement or having funds to pay for their children’s college education.

Perhaps the greatest benefit and value is peace of mind. Knowing that a family will financially survive the loss of income, or a business will continue in the case of an untimely death, can provide security to the policyowner. Being secure in the knowledge that a financially sound life insurance company is standing behind the policy also gives an owner confidence in the future.

Modified whole life insurance is a very nice addition to many people’s financial plans for the future. Cost is most often a major concern when someone is in need of purchasing a life insurance policy. Modified premium whole life meets this need, providing both affordability and protection.

Frequently Asked Questions