Whole Life Insurance Advantages
Whole life insurance is a form of permanent insurance with a cash value component that grows over time. Whole life insurance offers several major advantages over other types of insurance:
- Permanent coverage – Although whole life insurance costs more than term life per dollar of death benefit, a whole life insurance policy covers the policyholder over the span of an entire life, not just for a fixed term of years. Whole life insurance never expires. As long as the premiums are paid and the policy is in force, the policyholder’s beneficiaries will receive financial protection if the policyholder dies.
- Guaranteed death benefit – As long as premiums are paid as agreed to by the policyholder, a whole life insurance policy’s death benefit will stay at a guaranteed level.
- Cash value component that grows over time – Instead of just paying premiums each month, a whole life policy creates a kind of “savings account” for the policyholder in addition to the insurance coverage.
- Good for later in life – Not everyone who needs life insurance is young and in prime health; people who need life insurance later in life might be wise to consider whole life insurance.
- Tax advantages – The cash value of a whole life insurance policy is a tax-deferred savings vehicle.
- Helpful in estate planning and business succession – Some high net worth individuals or family owned small businesses can use whole life insurance policies as a tax and final expenses planning tool.
- Additional savings options –Whole life insurance can be a good place for people to put some money to grow tax-deferred.
Whole life insurance is meant to cover the person’s “whole life.” Even if you buy whole life insurance at age 25 and live for another 80 years, the policy will still pay the death benefit when your life is over. This is different from term life, which only covers a set period of years.
With term life, after the 5, 10, 20 or 30 year term is over, the policyholder no longer has life insurance coverage – and often cannot obtain new coverage due to age or any health conditions that have arisen. Whole life insurance guarantees that the policyholder will continue to have life insurance to provide financial protection to the beneficiaries, no matter what changes occur with the policyholder’s health, finances or life circumstances.
Guaranteed Death Benefit
Whole life insurance policies offer a fixed death benefit that will never change. As long as the premiums are paid in full and the policy is in force, the policyholder’s beneficiaries will receive the full amount of death benefit if the policyholder dies. This is different from universal life insurance, where the death benefit can change over time depending on the premium payments and other choices made by the policyholder.
Cash Value Component that Grows Over Time
Not only does it offer a death benefit to beneficiaries, but whole life insurance also provides benefits to the policyholder in the form of a cash value account. The cash value of a whole life insurance policy grows tax-deferred, and can be used as a source of savings or to finance short-term goals. Whole life insurance cash value grows at a fixed rate of income and is guaranteed not to decrease.
While term life insurance only delivers a benefit if the policyholder happens to die at an unexpectedly young age, and does not offer any benefits for policyholders who live a long life, whole life insurance delivers benefits in both scenarios – it offers financial protection in case the policyholder dies, and it also delivers cash value as a benefit in case the policyholder lives to life expectancy or beyond.
The cash value of a whole life insurance policy can also be obtained as a cash withdrawal if the policyholder surrenders the insurance policy. Surrendering a policy basically means that the policyholder agrees to no longer have insurance coverage in exchange for an immediate cash payment.
There are often tax implications to surrendering a whole life insurance policy, but if the policyholder has reached a stage of life where the cash value is worth more than the death benefit of the policy, it might make sense to withdraw the money.
Good for Later in Life
Not everyone who needs life insurance is able to buy it at a young age when they are in peak health condition. A growing number of people are starting families later in life, in their 40s and early 50s, and these new parents are often unable to qualify for term life insurance. Whole life insurance can be a good way to provide financial protection for their families at any age.
The cash value of a whole life insurance policy grows tax-deferred, making it a good savings vehicle with some significant tax benefits, especially for people who do not qualify for other tax-deferred investments, or who have exceeded the contribution limits on their tax-deferred retirement savings accounts.
Whole life insurance cash value accounts also give the policyholders the option of paying their life insurance premiums with pre-tax dollars from the accrued cash value of the policy. This can be a significant tax advantage for policyholders who are in their peak earning years.
Helpful in Estate Planning and Business Succession
Whole life insurance can be useful in planning for some of the complicated tax situations that can occur when dealing with the estate of a high net worth individual. The proceeds of a whole life insurance policy can be used to cover taxes or final expenses, and some high net worth individuals can even set up an insurance trust to use the death benefit of a whole life insurance policy to pay estate taxes.
For family owned businesses, there are a number of complex issues that arise when a business owner decides to pass on a business to his/her heirs. Whole life insurance can be used to insure a “key person” who is crucial to the business’s future success, it can be used to balance out the inheritance amounts of various children who may or may not be actively involved in running the business, and provide cash for the deceased policyholder’s heirs to use in buying out other family members’ shares of the business.
Additional Savings Options
Whole life insurance offers a tax-deferred savings vehicle that can be especially valuable for people who do not have access to tax-deferred investments like 401(k)s, or who have exceeded the contribution limits on tax-deferred retirement savings vehicles.
The cash value of a whole life insurance policy can be used as an emergency savings account or a longer-term savings fund to help finance larger financial goals like college educations, vacations or retirement.
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