Whole life insurance is the original life insurance and was once the only type available. It is a type of permanent insurance that has a savings feature which can be used during the lifetime of the insured person. When buying coverage, consumers should consider not only how much to buy, but also which type is best for their own needs and goals.
Whole life insurance has a fixed death benefit and fixed premiums that are established when it is purchased. Inexpensive term policies expire and have to be replaced, usually at a much higher premium rate. The premiums on whole life never increase and the death benefit is guaranteed to be paid whether the insured person dies at age 25 or age 95. The insurance company cannot cancel even if the insured becomes elderly or contracts a serious illness while the policy is in force.
With whole life, some of the premiums paid are diverted into a savings feature or cash value. The company pays interest on the money in the account, usually at a rate guaranteed in the contract. Up to 90% cash value of a whole life policy can be used as security for low interest loans. The principal of the loans do not have to be repaid on any schedule and the any outstanding loan balances are deducted from the death benefit if the insured person dies before repayment is made.
How Much To Buy
While financial experts recommend that individuals buy life insurance equal to 5 to 10 times their annual salary, annual salaries change, especially if a person is young when they purchase it. Potential policyholders should also take into consideration their assets and liabilities, such as their savings and retirement accounts, 401K, future pensions, mortgage payments, credit card debt, personal and business loans, and/or education costs. For example, the more liabilities or financial obligations your family has, the higher your death benefit should be to cover living expenses should something happen to you.
Take into consideration that the younger a person is, the lower the premiums will be. If whole insurance is being purchased as an investment, the best advice is to buy as much as an individual can comfortably afford. If financial circumstances change in the future, additional protection can be purchased. We recommend supplementing term coverage to meet your coverage needs for the future.
As An Investment
There are two major advantages to whole life insurance as an investment. For individuals who have difficulty saving money, it provides financial security and an automatic and relatively painless savings plan. There are also tax advantages over other types of investments, since the returns on whole life policies are tax deferred until they are removed, similar to a Roth IRA. Since loans against policies are not considered income, owners do not have to pay taxes on money borrowed against the cash value.
Since whole life insurance is permanent, it remains in force throughout an insured person’s lifetime. Premiums are calculated based on the age of the insured person at the policy’s inception and the person’s expected life span, including their current health, family medical history, diet, occupation and hobbies. On the other hand, applicants looking to avoid the required medical exam can check out no physical life insurance.
When compared to quotes for term life or universal life insurance, whole life is more expensive, but it is still affordable for most people. Because it accrues a cash value at a guaranteed rate of return, it can be used as a secure investment in financial planning.
Pros and Cons
The primary disadvantages are the lack of flexibility and the cost. Whole life policies have fixed death benefits that cannot be changed if needs increase or decrease over time. When compared to other types like term and universal life, whole life insurance quotes usually have higher premiums. When someone decides to buy coverage, it is important to weigh the pros and cons before making a choice.
On the other hand, term life insurance does not have any investment value, and whole coverage represents a more secure investment than universal because a minimum rate of return is guaranteed. The premiums never increase over the insured person’s lifetime as they can with term and universal. Since whole life is permanent, it cannot be cancelled by the insurer except for non-payment of premiums, and the insured person retains his or her vested interest in the cash value of the policy.
There are several types of policies, including limited payment whole life, endowment life insurance, and single payment. A limited payment requires fixed payments over a pre-determined period of time, say 20 years, and at the end of the period, the policy is paid up and remains in force with no further payments. An endowment involves a limited payment, which is often used to provide a nest egg for children and their education/tuition costs. A single payment is paid in a lump sum, and remains in force unless the cash value is removed.
Do Policies Pay Dividends?
Not all whole life policies pay dividends, but certain types, called participating policies, pay annual dividends to policyholders. Dividends can be paid out directly to the insured person or they can be added into the cash value to make it grow faster. Dividends that are paid out must be reported as income and are taxable, but if the dividends are invested in the cash value, they are tax-deferred and no taxes are due until they are withdrawn.
Term vs. Whole
While whole life insurance offers cash value and the security of permanent coverage, term life offers flexibility. An individual’s financial needs and circumstances change over time, but the fixed death benefit of whole life policies cannot be altered. One solution is to purchase a whole policy and supplement the death benefit with term life insurance as needed. By combining the two, an individual can get the advantages of both and always has the right amount of protection.
Furthermore, consumers should also research short term disability insurance and long-term care insurance.
For younger individuals, the cost of term life is considerably lower than the cost of whole life insurance; however, whole premiums never increase, but term life premiums increase every time a policy is renewed or replaced. Many financial consultants believe that over the course of a lifetime, the premiums for term life and whole life are about the same, but whole coverage accrues a cash value while term does not.
Universal vs. Whole Life
Unlike whole life insurance, which guarantees a return on investment, the cash value in universal policies is not secure. Universal life invests the cash value in financial instruments like stocks and bonds, which may pay a higher return or may result in a loss of cash value. While universal policies have flexible premiums, the minimum premium amount can be increased if the cost of administering the coverage increases. If the cash value reaches zero, universal policies can be cancelled.
Whole life insurance offers advantages, especially for people who buy it when they are young and rates are at their lowest. It can be used as an investment for retirement, college tuition or to meet other financial goals. It has tax advantages over other types of investments, and whole represents a relatively painless way to save money while protecting a family against financial loss.