Guaranteed Whole Life Insurance
Whole life insurance provides insurance coverage and the potential for cash accumulation for the life of the policy owner. Guaranteed whole life insurance charges level premiums as long as the policy is in force. That means that as long as the insured pays the premiums as scheduled in the amount he or she agreed to, the premiums will not rise, even if the policy is purchased at a young age and remains in force until the maximum age allowed by the state in which he or she purchased the policy. In most states, the maximum age is now 100. For example, if the policy were purchased at age 35 with a premium amount of $2,300 per year, that amount would remain constant until the death benefit is paid, the policy is surrendered or the insured reaches age 100.
The premium paid for guaranteed whole life insurance is split between the amount that is used to pay the death benefit and the amount that is invested in the cash accumulation account. The amount that is applied to each depends on the policy owner's age and the type of policy he or she purchases. Typically, the amount that is applied toward the death benefit increases over time while the amount that is applied toward the cash account decreases. This is because on average, it costs more to insure an older person than it does to insure a younger person. The older a person gets, the more likely it is the insurance company will have to pay a claim.
The Cash Value of Guaranteed Whole Life Insurance
The cash value amount on a guaranteed whole life insurance policy grows tax-deferred as long as the policy is in force. This is just one of the reasons that people purchase guaranteed whole life insurance policies as an additional way to save for retirement. Even if the policy is purchased with after-tax dollars, the amount that is earned each year compounds at a rate that is much faster than accounts for which taxes must be paid each year.
One very popular whole life policy is called a "participating whole life policy". This type of policy allows the policy owner to participate in the earnings of the insurance company. This policy essentially pays a dividend. If the insurance company has earnings that it will distribute to shareholders in the form of dividends, it will pay owners of participating policies as well.
While earnings and dividends are never guaranteed, life insurance companies have posted some of the most consistent earnings over the past several decades. Insurance companies tend to be very conservative with investments and therefore do not take substantial risks with the money their policy owners invest with them. Further, insurance companies are required to keep investment money separate from money that will be used to pay claims.
In order to feel more secure about a guaranteed whole life insurance policy, those interested should always make sure that the insurance company has been issued a high credit rating from the four insurance company credit rating agencies. While Moody's Investor Services and Standard and Poor's are the two most well-known credit rating agencies, A.M. Best and Fitch also issue insurance company credit ratings. The rating agencies review past claim payment performance, current balance sheets and make a determination about the company's ability to pay future claims. Because any insurance policy represents a significant long-term debt obligation, it is imperative that the policy owner feels confident that his or her money will be available when it's needed.
Guaranteed Whole Life Insurance and Loan Values
The cash-accumulation feature of guaranteed whole life insurance allows the policy owner to borrow against the policy or use it as collateral for a loan. Each insurance company sets the rates at which the money can be borrowed. State insurance boards also monitor the rates as part of the insurance consumer protection services they provide.
Policy owners who are short on cash can also choose to pay their premiums out of the accumulated cash value. This can be very helpful for those who are short on cash but who want to make sure they maintain the policy. With most policies, the only drawback to paying the premiums out of the cash account is that the amount of tax-deferred growth will be reduced. For older policy owners without significant debt, or for those with other substantial assets, this option also makes sense.
Death Benefits Paid on Guaranteed Whole Life Insurance Policies
Regardless of the value of the cash account of a whole life insurance policy, the death benefit is always guaranteed. However, due to the risk of inflation, it's usually a good idea to select a policy that pays the beneficiary an increasing death benefit, the amount of cash that has been earned in the cash-accumulation account or to purchase a cost of living adjustment (COLA) rider. Inflation is the number one enemy of the death benefit paid on any insurance policy.
A death benefit worth $500,000 at the time the policy is purchased will purchase less in 10, 20, 30 or more years. Even if the overall rate of inflation is low, the prices of some goods rise much faster than the rate of inflation. For example, the percentage increase for health care and medication has risen by double digits every year for the past several years. Commodity prices, such as those for food and gasoline have also risen because of the lack of strength in the US dollar. A lower dollar as compared to other world currencies means that these items will continue to rise even if inflation is low or non-existent.
The beneficiary of a guaranteed whole life insurance policy can be a spouse, child, grandchild or even a favorite charity. Many people today purchase whole life in order to leave a not-for-profit agency with a cash gift. The death benefit can then be used to provide services, maintain or purchase property, hire staff or for any purpose the charity sees fit.
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