Whole Life Insurance Guide
Whole life is the simplest type of permanent life insurance and does what its name implies--it provides life insurance for your entire life. With lifetime coverage, your beneficiaries collect an insurance benefit no matter when you die--as long as you pay your premiums and keep your policy in-force.
In contrast, term life insurance provides coverage for only a certain number of years; typically from 10 to 30 years. Beneficiaries only receive the death benefit (the amount of life insurance coverage purchased) if the insured person passes away during the stated term.
Because of whole life's broader coverage, and added features, it is usually more expensive than the same amount of term insurance. However, whole life insurance premiums are more affordable over the long run because you would eventually pay more if you had to renew your term policy later in life.
Who should consider whole life insurance?
Whole life insurance may be a good fit for those who have a permanent need for life insurance, as well as for those who prefer long-term predictability, says the Life and Health Insurance Foundation for Education (LIFE).
- Guaranteed death benefit: Whole life insurance provides a guaranteed minimum insurance benefit for your beneficiaries when you die.
- Guaranteed rate of return: You get a guaranteed rate of return on the cash value of your life insurance policy.
- Premium never goes up: Whole life features a level premium that shouldn't increase, no matter how long you live.
Cash value insurance
Cash value is the savings portion of your life insurance policy, which builds on a tax-deferred basis over time. One of the benefits of whole life insurance is the level premium. In order to provide steady premiums, whole life insurance payments exceed the cost of insurance coverage during the early years. The extra premium goes toward building a reserve, called cash value, and helps pay for the insurance in later years when life insurance protection costs exceed the premium, according to the California Department of Insurance.
According to LIFE, you also can borrow against a whole life insurance policy with the cash value serving as collateral. Unlike credit lines or loans from banks, you don't have to go through a credit check or specify how you'll use the money to access the cash. But you must repay the insurance company with interest or the policy could lapse or your beneficiaries may receive a reduced death benefit.
Cash value can also be used to pay premiums if finances get tight. Assuming you've accumulated enough cash value in the policy to pay for the premium and continue current insurance protection, the Insurance Information Institute says, you could stop or reduce your premiums.
If you must surrender your policy before maturity, usually at about age 100, the cash value is paid to you, the policyholder, as cash surrender value--less any loans that have been taken against the cash value. The guaranteed values are yours if you must surrender your policy; however, policies that are surrendered in the early years may have little cash value. Additionally, many whole life insurance policies surrendered within the first seven years are often subject to substantial surrender fees.
Whole life insurance can pay dividends
An advantage of whole life insurance is the opportunity to earn dividends, which could boost your death benefit and cash value above the guaranteed levels stated in your policy. Dividends are issued when the insurance company does well and passes on those favorable financial results to policyholders. You could also elect to receive your dividends as cash.
Although many policyholders become eligible to receive dividends after the second policy year, dividends are not guaranteed.
Whole life insurance has many benefits
Consider whole life if you need insurance for as long as you live, want to accumulate savings that you can borrow against and like the certainty of fixed premiums, a guaranteed death benefit and a guaranteed rate of return.
Barbara Marquand is a writer with more than twenty years of reporting experience for newspapers, magazines and Web sites. She writes frequently about insurance and other business topics.
Life and Health Insurance Foundation for Education - Permanent Insurance - http://www.lifehappens.org/life-insurance/permanent-insurance
California Department of Insurance - CONSUMERS: LIFE INSURANCE AND ANNUITIES Guide - http://www.insurance.ca.gov/0100-consumers/0060-information-guides/0020-life/life-insurance.cfm#Choosing%20the%20Appropriate
Life and Health Insurance Foundation for Education - FAQ - http://www.lifehappens.org/life-insurance/frequently-asked-questions
Insurance Information Institute - What are the different types of permanent policies? - http://www.iii.org/articles/what-are-different-types-permanent-policies.html
Insurance Information Institute - How should I choose what type of life insurance to buy? - http://www.iii.org/articles/how-should-choose-what-type-of-life-insurance-to-buy.html
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