Whole life insurance, also known as permanent life or straight life insurance is a cash value type of policy which offers protection during the entire lifetime of the insured.
It has two main benefits:
- A guaranteed death benefit and premium
- The cash value that is accumulated over the length of the policy and can be used as savings or could be borrowed against should you need money while you’re still alive.
A whole life policy will cover the insured for his/her entire life rather than a specific period, which is the case for term life insurance. Whole life insurance premiums are applied to the cost of insurance and to the cash value. All policies come with a guaranteed cash value.
Whole life insurance is more expensive when compared to other types of life insurance, such as term life and universal life, because of the guaranteed lifetime coverage and guaranteed cash value.
Typically, you will be paying more if you took out a whole life policy with the investment savings option as compared to taking up the basic term insurance policy. A whole life insurance policy also pays you some tax-free dividends and this offers benefits and flexibility not seen with term life insurance.
Whole Life Insurance Plans
When it comes to whole life insurance, there are many to choose from:
- Non-Participating Whole Life- This is the most basic whole life policy. You have your guaranteed premium, death benefit, and cash value. As long as you pay the premium, you have the coverage.
- Participating Whole Life- This operates exactly like the non-participating whole life except it comes with a dividend option. The dividend is not guaranteed and is based on the insurance company’s earnings annually. You can use dividends to reduce or pay premiums, buy extra life insurance, accumulate, or withdraw.
- Simplified Issue/Graded Death Benefit Whole Life– This whole is life for consumers who have had health issues and cannot qualify for one of the above whole life policies. These policies will accept people who have had a history of cancer, uncontrolled diabetes, heart attack, and stroke. Be sure to read the contract well, these policies death benefits could be graded for two years. This means they don’t pay the full death benefit for the first two years of the contract.
- Guaranteed Issue Whole Life- This is a guaranteed issue life insurance policy. These types of policies are for consumers who can’t qualify for any other type of life insurance. These are their only hope. There are no health questions at all, but the death benefit the first two years is only paid if the death is caused by an accident. After two years the policies pay for any type of death, sickness or accidental.
- Single Premium Whole Life- This whole life policy requires a single premium payment, which is determined by the amount of life insurance chosen. After the initial payment, no more premium is do and you will have the same benefits as regular whole life policy. This also referred to as a paid-up policy.
Even if the cash value component was absent, you need to bear in mind that with whole life insurance, you are buying coverage which will last a lifetime as compared to term insurance which covers for specific periods, such as 20 or 30 years. In fact, whole life insurance usually cost 5 to 10 times more than term life insurance but does have cash value and lasts forever.
Insurance underwriters typically determine the amount they will charge for policies by assessing risks. Higher risks mean that the policy will be more expensive, and this is the only way an insurance company will remain profitable. Therefore, the chances are that you will die before your whole life insurance policy matures. In the case of term life insurance, the risk is much lower since insurance companies don’t pay claims when the term policies expire. When whole life premiums are calculated, they are aimed at financing the death benefit payout over the period of your life.
The advantage of whole life is that the premium and death benefit will remain the same. A whole life policy also builds cash value, which can be used if needed later in life. Term life insurance just doesn’t offer this feature.
The Benefits of Whole Life Insurance
Whole Life Insurance, while can be expensive, does meet the financial needs of many families. The guaranteed premium and lifetime coverage allows to leave loved ones a benefit that you can’t outlive.
- Financial Security for a Your Family- For people with a family that depends on them, particularly those with special needs children, they are constantly worried about how their families will live should they die. You want your family to be taken care of financially even in your absence and a whole life insurance policy gives you peace of mind knowing that all the financial needs and obligations of your family will be met no matter when you die.
- Living Benefit Should You be Diagnosed with a Terminal Illness- Have you taken time to think about what you will do should you be diagnosed with a terminal illness? Who would be there to provide for your family’s financial needs and how would all the medical bills get paid? There are life insurance policies that could be endorsed with a rider to offer coverage for a terminal/chronic illness if you were to be diagnosed with one. You could use the money to shelve the medical bills or pay for living expenses accrued by your family.
- The Ability for You to Borrow Against the Cash Value Benefit- Different whole life insurance policies usually give you the option for one to build cash value which could be later borrowed against. For policyholders, this cash value could be accessed for different needs; financing college education, clearing bills, starting a business or any other financial need.
Should You Use Whole Life as An Investment?
While whole life insurance lets a policyholder accumulate cash value and even use the savings in the course of their life, as far as investments are concerned, it is not the best option. Based on your personal situation and the market performance, you could consider buying term life insurance that spans a longer period and invest the difference.
With whole life policies, the rate of return is typically very low compared to other investment types, even after considering the tax savings. People are often advised against using life insurance entirely as an investment tool. In addition, you need to judge your policy choices based on protection rather than the rate of return.
While whole life insurance might fit certain situations, the cost itself usually makes it a bad purchase. There are other permanent products, far cheaper than whole life, that last a lifetime also. Whole life is a great option if you have had health problems and need something simplified or guaranteed issue. We always advise to contact an experienced agent that can explain all your options. This will help you make an informed and educated decision. If you have any questions or comments, please don’t hesitate to reach out or give us a call.