All About Whole Life Insurance
Talking about life insurance is uncomfortable, but if you have a family, the discussion is necessary. Not only does your family have to cope with the loss of a parent, but they can also endure financial hardship if a life insurance policy is not in place. Life insurance may be the only financial support that a family has to make ends meet when a parent dies.
There are many types of life insurance products on the market today. Term life insurance and whole life insurance are two of the most popular policies on the market today. Below we take a deep dive into the world of whole life insurance.
What is Whole Life Insurance?
A whole life insurance plan is a form of permanent life insurance. The policyholder decides how much coverage, or death benefit, they wish to have. Whole life insurance policies have no term, meaning they remain in effect for your entire life. As long as the holder continues making their premium payments, there is coverage.
Whole life insurance policies include both a term life insurance plan and a savings account. The savings account often referred to as the cash value, is funded by a portion of the premiums that you pay each month. Insurance companies will pay interest on your savings account, raising the policy’s cash value. As the cash value of your policy increases, the term life component will decrease.
Since whole life insurance policies span a person’s lifetime and accumulate a cash value, the premiums are higher than other types of policies. They typically take longer to set up than a term life insurance policy and require a medical exam.
How do whole life insurance policies work?
Building up the cash value of a policy is one of the benefits of a whole life insurance plan. Similar to a savings account, the accumulated cash value can be withdrawn by the policyholder is the most common type of term life insurance policy on the market today. Level term life insurance pays out the same benefit regardless of when death occurs. These plans typically range from 5 years to 30 years. The number of monthly premiums paid under a level term plan will remain the same until the policy ends.
Why should you buy a whole life insurance policy?
Whole life insurance policies have several benefits including;
Guaranteed payout– The death benefit to be paid out to your beneficiaries is guaranteed. Whole life policies can’t be reduced or revoked. Policies can only be canceled if premiums aren’t paid.
Accumulate savings – It can two decades of premium payments to really start seeing a healthy cash value. Policyholders can leverage this savings by withdrawing it or borrowing against it.
Consistent premiums – Under a whole life insurance plan, your premiums will remain the same during your coverage.
In addition to the above, a whole life insurance policy can help families to pay for funeral costs or other related expenses.
Why should you not buy a whole life insurance policy?
While there are many benefits to a whole life insurance policy, there are several drawbacks:
High Cost – Since whole life policies remain in effect until you pass away, the premiums will be higher than other forms of life insurance. Premiums under a whole life plan will average approximately 6 to 10 times more than what you would pay under a term life insurance policy.
Lower Returns – Interest that is paid on the savings portion of a whole life policy is typically less than what you would get if you invested elsewhere. Putting your money into an IRA may be a better investment.
Effective Alternatives – If you die unexpectedly, your beneficiaries would receive the same death benefit under a whole life insurance policy as they would under a term life insurance policy. The higher premiums paid are typically not worth it.
Who Should Get Whole Life Insurance?
Whole life insurance policies aren’t for everyone. They take longer to set up and cost more money. People who are looking to retain some value from their monthly premiums paid in would find whole life insurance attractive. The accumulated cash value can be withdrawn or used as collateral for a loan to send your kid to college or buy a house. Young families may choose to get a whole life insurance policy in order to keep their premium payments down in the future.
Life insurance is an uncomfortable topic for all of us. Take the time to learn about the different insurance options available to you.
