Whole Life Insurance Features
Whole Life Insurance has several features that make it different from Term Life and other forms of life insurance:
- Permanent Coverage
- Level premiums
- Pays a death benefit
- Builds cash value (tax-deferred)
- Serves as an investment vehicle
- Borrow against cash value
Whole life insurance is just what its name suggests – it lasts for the “whole life” of the policyholder, unlike term life policies which expire after 10, 20 or 30 years (depending on the policy). While term life policies are often best for short-term financial planning – providing for the care of young children, paying off student loans, or paying off a mortgage – whole life insurance is designed for longer-range financial plans, such as estate planning, final expenses and charitable donations after the policyholder’s death.
Level Premiums: The Whole Life Advantage
Premiums on a whole life insurance policy stay the same for the duration of the policy – policyholders pay the same amount every month, with no increases. Level premiums offer the advantages of predictability (the policyholder always knows how much is due each month) and increasing affordability (as the policyholder reaches the later years of life, the monthly premium becomes a relatively smaller expense).
With a term life policy, premiums are calculated based on the term (10, 20, or 30 years) that the policy will be in effect. Whole life insurance policies calculate the monthly premium cost by averaging the cost over a much longer timeframe – until the policyholder reaches the age of 95 or 100. This has the effect of the policyholder paying larger premiums in the early years of the whole life insurance policy while reducing premiums in the later years – whole life insurance is designed to give the policy holder upfront protection in the event of death, but long-term growth in the cash value of the plan.
Some whole life insurance policies offer the option of “limited payment” plans, where the policyholder is allowed to pay the full premium amount over a shorter period of time. The premiums are still the same each month, but the policyholder has the option of paying off the insurance faster, rather than having a monthly payment for every year of his/her life.
The Whole Life Death Benefit
Just as with a term life policy, whole life insurance pays a benefit in the event of the death of the policyholder. The difference with whole life insurance is that the benefit is payable anytime over the course of the policyholder’s life – whether the policyholder lives to be 65 or 105, the whole life insurance policy will pay a benefit as long as the policy premiums have been paid and the policy is in force.
This is different from term life insurance, which only pays a death benefit during a specified timeframe – for instance, if a policyholder buys a 20-year term life insurance policy starting at age 30, that policyholder’s family will only receive a death benefit if the policyholder dies by age 50. Whole life insurance is not limited to a certain timeframe; it gives the policyholder’s family continued protection for as long as the policyholder lives.
Building Cash Value
One of the major benefits of a whole life insurance policy is its cash value component. In addition to the death benefit, whole life insurance policies also enable policyholders to build up a store of cash value with every premium payment they make during their lives. This is a kind of “forced savings” that helps policyholders stay insured while also building up a financial asset – and the cash value of a whole life insurance policy is allowed to grow tax-deferred, similar to a 401(k) plan.
People who have trouble saving for retirement can enhance their retirement security with a whole life insurance policy – every time policyholders makes a life insurance payment on a whole life insurance policy, they are also saving some money for themselves. Whole life insurance policies also allow policyholders to borrow against the cash value of the policies, serving as a “rainy day” fund to help provide money when it is needed for emergencies or unexpected expenses.
Whole Life as an Investment Vehicle
Whole life insurance can serve as a good investment vehicle, especially for policyholders who do not have access to a 401(k) account through their employers, or who are self-employed. The cash value of a whole life insurance policy grows tax deferred, and the policyholder benefits from investments made by the insurance company, which then pays dividends to the insurance policies owned by the policyholders.
While dividends are not guaranteed, and while the stock market can go up or down in any given year, over the life of a policyholder, whole life insurance offers the potential to provide returns on investment in a way that term life insurance does not.
With term life, if policyholders are still alive at the end of their 30-year term, they essentially have nothing to show for the money they’ve spent on premiums during the past 30 years. With whole life insurance, policyholders receive financial protection for their families (in case they die) while also building up an investment for the future (in case they live longer than expected).
Borrowing Against the Cash Value
In addition to serving as an investment vehicle for retirement, a whole life insurance policy can also serve as a “rainy day account.” The cash value of a whole life insurance policy does not just sit locked away through the years; this is an available asset that can be tapped to borrow against for emergency funds.
This gives policyholders a store of value that they can access in case they need some flexibility in managing their finances – for example, if they don’t want to apply for a loan or run up a high-interest credit card balance, or if they want to avoid drawing down a savings account.
Whole life insurance offers a variety of unique features that allow it to meet a different set of goals than otherwise possible with term life. People who want the assurance of a death benefit while also having an investment component with cash value should consider buying whole life insurance.
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