Whole life insurance is not for everyone. But it is a solution for a lot of people.
We’re going to dive into what whole life insurance is, who it is actually for, and what companies are best to buy it from. But, understand your own situation and product needs before going any further, as a whole life policy tends to get quite a bit of criticism (and sometimes for the right reasons).
Just remember, it might be for you… and it might not.
Whole life insurance is an investment in the security of you and your loved ones in the event of your eventual death. It offers several other benefits in addition to the lifelong protection of your family, no matter how old you become.
You may opt to buy life insurance to cover business debts or a mortgage should your family lose the financial security of your income whether you’re the head of the household or not. But these typically are not reasons for a whole life.
What Exactly Is A Whole Life Insurance Policy?
Whole life insurance is a type of permanent life insurance which covers the individual for their entire life.
Also known as cash-value life insurance, it includes both a death benefit which is paid to your beneficiaries and a cash-value portion which helps it to grow. You may be aware of other types such as universal life insurance or term life insurance.
Whole life is a pretty basic type. You’ll have a set premium which will stay stable for the life of your policy. Like any other life insurance policy, you should choose an insurer who is financially sound to ensure your family is served when the time comes. In this way, purchasing a life insurance policy is a matter of trust.
Whole Life versus Term Life Insurance
To determine which is right for you, let’s begin with differences between these two common types.
First, there is the life of the policy. Whole life insurance lasts until the insured dies. Term life insurance has a fixed period of coverage which can run anywhere from 10 to 30 years. It is temporary although it may last for a relatively long time.
Both are simple, straightforward types of life insurance. Both provide a death benefit to the beneficiaries of the insured. Whereas term life insurance is less expensive, whole life insurance costs considerably more because of the added value it provides the insured. In addition to the death benefit, whole life insurance has a cash value which increases over its lifespan.
The Advantages of Whole Life Insurance
The primary benefits of whole life insurance revolve around its cash value.
Part of your premium will go toward the cost of the insurance and its death benefit. The balance is part of its cash value. The money you pay in contributes to this fund, in addition to a stated interest rate by the carrier you choose. In many ways, it’s like having an IRA or 401(k). Like these investments, your cash value earns interest over time which is tax-free.
And the best part of is you can withdraw from these funds tax-free as well—as long as the amount is under the total amount of premiums deposited. You can also opt to take out a tax-free loan against the accumulated cash value. The catch with either way of accessing your funds is it can reduce the death benefit your beneficiaries ultimately receive, or incur taxes if by surrender.
The death benefit offers your family another important advantage.
Generally, your beneficiaries won’t have to pay interest on the amount they receive. It’s one less thing your family needn’t worry about during a trying time. They will most likely not pay taxes on this benefit either. It’s one of the most comforting of the advantages of whole life insurance.
Your loan will still accrue interest which will affect the balances of both your cash value and the death benefit. In addition, you don’t have to pay it back either.
It will also go against the value of the death benefit. You can also use the cash value to pay your premiums, if you so choose. These are things to consider as part of the total costs and benefits of a whole life insurance policy.
If there is enough cash within a policy where the interest gained annually is above your cost of insurance, the policy can also be considered “paid up.” This means you can stop paying in, and the policy will be on autopilot until you pass, where it will deliver the final death benefit.
Understanding the Cash Value of Your Policy
It’s essential to understand the nuts and bolts of how the cash value of whole life insurance works.
First, it is a safe way to save money because it is insulated from the effects of market fluctuations. Second, the cash value accrues interest which is tax-free, with no limit. And third, you may earn dividends as well, as long as the insurer is a dividend paying company.
However, the cash value is a living benefit of your whole life insurance. Its advantages lie in your ability to withdraw or take a loan against it while you’re alive, tax-free. It does not go to your beneficiaries after you pass, however. The insurance company will pay the death benefit to the survivors, in addition to any paid up additions it accrues.
How Much Whole Life Insurance Do You Need?
There are several things to consider when deciding how much whole life insurance coverage to get.
Part of this figure involves your intentions for whole life insurance. Many people do not buy whole life insurance for the security of a source of income replacement; this is what term is for.
An individual may also buy a term life insurance policy to ensure the family’s debts are handled. These can include the short-term expenses of medical costs and burial. It can also cover long-term needs such as a mortgage or business debts. You may have plans for future dispersal to fund your children or grandchildren’s education expenses.
Whole life is for final expenses, final medical bills, and not much more! It is okay to have a small whole life, and the rest of your coverage as term.
Calculating Your Coverage
Along with the probable income replacement, consider the other expenses you want to cover to determine the amount of coverage you need. Other factors will also play a role. Think of things such as your spouse’s income earning potential. Also, give some thought to how long you’d need to support your spouse. You probably want to ensure a comfortable life for your mate.
You’ll want to balance the amount of coverage you want to have with the cost of whole life insurance.
However, be realistic about the amount you’ll need. You can think of whole life insurance as part of the entire package for planning for the future for your family.
For example, let’s say you actually need about $300,000 in coverage to replace income to a spouse, and to pay for debts and other obligations. Do not purchase a $300,000 whole life policy!
The proper way to do it is likely a term policy for, say, $250,000, and the remainder in a permanent death benefit. This would not only save you a ton of money now, but save you money in the future as you’re able to lock in your current age on the permanent insurance policy.
Talk To An Expert First
We suggest talking to us, or another insurance or financial professional, about a whole life insurance policy before buying one. It’s a very valuable product to have in your total arsenal, but an improper policy could lead to a big waste of money.
When it comes to whole life, less is more. Other policies, like universal policies, are more budget friendly if you need a larger death benefit over the long haul.