A whole life insurance policy is a type of permanent life insurance which provides death benefit coverage for the entirety of your lifespan. In addition to the coverage, you can also utilize the tax benefits of having a policy which contains a savings component called “cash value”.
The cash value portion of the premium can be directed to an investment account which then grows over time. As the value increases, you may have the option to withdraw funds or borrow against it.
How Does a Whole Life Insurance Policy Work?
A whole life insurance policy provides the benefits of a permanent death benefit as well as living cash value and asset building. However, the policy should not be confused with other types of policies that provide permanent living benefits.
The policy provides benefits in two main components which consist of the cash value or savings portion, and the death benefit. The savings portion can be used to withdraw funds for unexpected expenses, create a low interest loan based on paid premium amounts, or build asset value from reinvested portions.
Also, the payout mechanism of proceeds from the death benefits can be issued in one lump sum payment or designated as installments or allotments. When claiming the funds, the policy beneficiaries are not required to provide additional income or premiums in order to access the funds. However, the account will incur taxes based on the rate of interest incurred throughout the term of the policy or should the policyholder decide to take advantage of the cash surrender option via policy cancellation.
Benefits of a Whole Life Insurance Policy
- The policy has a lifelong amount of coverage versus a set timeframe
- Benefits are remitted once the death of the policyholder occurs
- The cash value can be accessed for investment, borrowing, or other expenditures while living
- The policy pays out a permanent death benefit
- Funds withdrawn are typically considered tax free
Pros and Cons of Whole Life Insurance
As with any policy there are pros and cons to keep in mind before making a decision that will affect the lives of you and your loved ones. While some benefits may be extremely beneficial to your situation, there are restrictions that will have to be complied with based on industry regulations and predetermined guidelines.
|Death benefits are decided by initial contract||Interest earned is subject to taxes|
|Dividend payouts can be used to increase benefits||Cash withdrawal decreases policy value|
|Policy proceeds exempt from beneficiary’s gross income||Policy loans are subject to accrued interest|
|Interest rates are fixed based on the contract||Pre-term policy sales proceeds are taxable|
|No policy expiration date||Cash value does not equal full policy value|
Whole Life vs. Term Life Insurance
Term life insurance is a policy that provides coverage for a set period of time between one year and thirty years of time. Like whole life insurance the policy also offers death benefits which can be used to cover a variety of expenses like funeral costs, educational expenses, or any other type of expense deemed necessary.
Unlike whole life, term life does not include a cash value component. Term life insurance is cheaper than whole life because it’s temporary and has no cash value.
There are some key differences to take into consideration when deciding which policy to obtain because they have varying degrees of coverage.
Whole Life Insurance
- Coverage lasts the entire lifetime of the policy holder
- No policy renewal necessary
- Adding a withdrawal clause allows for return of paid premiums during cancellation
- Disability riders protect benefits
Term Life Insurance
- Coverage lasts for a specified term
- Policy renewal is necessary at non-guaranteed lock in rates
- Coverage is based on age and health related factors
- Premium payments are non-refundable
- Lower premium
Who Should Get It
Whole life insurance is for anyone who wants the value of a permanent death benefit, cash value payout options and long-term flexibility. As the death rate has increased exponentially in the past few years, having a plan in place could be the difference between being prepared and added stress or financial strain.
The peace of mind that they provide in knowing exactly what your premiums will be over the next several decades, as well as living cash benefits in times of need, may be exactly the option that will keep you worry free.