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What is Modified Whole Life Insurance?

modified whole life insurance
Insurance Quotes 2 Day Team

Written By Doug Mitchell

Doug Mitchell, CLU holds a BA degree in Finance from Auburn University as well as having obtained a Chartered Life Underwriter (CLU) designation from The American College in Bryn Mahr, PA.  Doug has spent close to 30 years in the insurance and financial planning industry and has held licenses to sell securities, long-term care insurance, health.  Doug is also a financial blogger addressing the topics of life insurance, annuities and retirement income planning.

Holly Mitchell  &

Holly Mitchell’s background in life insurance insurance goes back to 1985 when she worked for her father who was a New York Life agent. Holly has a marketing degree from Auburn University and has had a life insurance license since 2008. In addition to advising life insurance for customers all around the country, Holly is our website fact checker.

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Rob Pinner is the founder and CEO of Pinner Financial Services servicing all 50 states. Rob started his insurance career in 2002.

Louis LaBash

Results-driven and innovative life insurance professional with 30 plus years of life insurance industry sales and marketing experience. Recognized as a pioneer in the field, leveraging phone and internet channels to exceed personal sales of over $100 million during the first decade of the 21st century. Creator of a highly effective intuitive IUL life insurance sales software that facilitated the sale of millions of dollars of indexed universal policies by numerous life insurance agents. Proven track record as a Managing General Agent (MGA), Life Agent, IUL Life Insurance Sales Software developer, and leading-edge creator of insurance marketing tools, educational content, and delivery systems.

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Wondering, “What is a modified whole life insurance policy?”  It’s very similar to traditional whole life insurance, but premiums are lower initially. 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.  The reason for the term modified is that for the first 1 to 5 years of the policy, the premium is kept low and then will increase after that time.

 

Understanding Modified Premium Whole Life Insurance 

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 traditional whole life policy. The increased premium rate then remains level for the life of the policy.

 

The Benefits of Modified Premium Whole Life for Policyowners and Insurers 

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 that 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 Death Benefit of Modified Premium Whole Life for Policyowners and Insurers

 An intriguing aspect of modified premium whole life insurance is the structure of its premium payments. In the initial years of the policy, the monthly premiums are notably lower than those of a traditional whole life policy. This feature is particularly beneficial for individuals seeking substantial life insurance coverage but have a limited budget. The lower premiums in the initial years make this policy more affordable.

Despite the lower premiums during these early years, a key advantage of modified premium whole life insurance is that the face amount of the policy—the total amount of coverage provided—remains constant throughout the policy’s duration. 

As the policy matures, the premiums will increase. This increase is typically manageable for most policyholders, as it coincides with a period when they will likely be more financially stable. By this time, many individuals have advanced in their careers or have more robust financial resources, allowing them to afford the higher premium payments comfortably.

Moreover, the level death benefit amount throughout the policy’s life is a significant advantage for long-term financial planning. Policyowners can confidently make future financial decisions, knowing the exact coverage they have. This stability is particularly valuable for those looking to secure financial protection for their family, ensuring they have sufficient coverage to meet future needs like paying off debts, covering educational expenses, or replacing their income in the event of premature death.

 

Cash Value Growth in Modified Whole Life Policies 

Modified whole life insurance policies share a notable feature with traditional whole life policies: accumulating cash value over time. This cash value is an integral part of the policy, acting as a savings component that grows tax-deferred. In the case of modified whole life insurance, while the premiums in the early years are lower compared to traditional whole life policies, this also means that the cash value accumulates at a slower pace initially. This slower accumulation is a trade-off for the more affordable premiums in the policy’s early stages. However, this does not diminish the long-term value of the policy, as the cash value continues to grow and compound over the policy’s life, providing a financial resource that the policyholder can tap into under any situation that arises. 

Modified Premium Whole Life Dividends

Modified whole life insurance policies, like their traditional whole life policies, will earn dividends.  These dividends can significantly impact the policy’s cash value. These dividends, while not guaranteed, are typically paid out by the insurance company when it performs well financially. For policyholders, dividends are additional to the guaranteed cash value growth.  Additionally, dividends can be used to purchase additional insurance coverage or reduce future premium payments.  

 

Why Modified Whole Life is Ideal for First-Time Policyholders

 

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 can 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 policy rates reflect this. A healthy, younger person who qualifies for a higher face amount but needs an initially lower premium will find modified premium whole life insurance ideal for their situation.

 

Modified Whole Life: A Smart Choice for Young Businesses

Businesses that are start-ups or are in their early stages will also find modified premium whole life beneficial. These businesses often need 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.

 

Various Uses of Modified Premium 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.  Choosing a financially sound life insurance company 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 purchasing a life insurance policy. Modified premium whole life meets this need, providing both affordability and protection.

 

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Frequently Asked Questions

What is Modified Premium Whole Life Insurance?

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.

Can Modified Premium Whole Life Insurance be used for my business?

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.

What is a benefit of buying a Modified Whole Life Insurance policy?

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 policy owner who needs a set face amount for a lower premium early in life and can comfortably pay the higher premium in upcoming years.

author avatar
Doug Mitchell, CLU Independant Advisor
Doug Mitchell, CLU holds a BA degree in Finance from Auburn University as well as having obtained a Chartered Life Underwriter (CLU) designation from The American College in Bryn Mahr, PA. Doug has spent almost 30 years in the life insurance industry and has also held licenses to sell securities, long-term care insurance and home and auto insurance. Doug is a Top of the Table Million Dollar Round Table member (MDRT).  MDRT is a global, independent association of the world's leading life insurance advisors.  For two years, Doug served as President of the Auburn Opelika Association of Financial Advisors and has been a member of the Million Dollar Round Table. He obtained Life Millionaire status at Horace Mann Insurance Company and was awarded the Life Agent of the Year Award. Later in his career with New York Life he was an Executive Council Member. Doug currently serves as President of Ogletree Financial, a managing general agency serving life insurance agents and clients in all parts of the United States. Today, Doug’s main focus is servicing 1000s of policyholders and growing the agency through the reach of  insurancequotes2day.com.