What is Whole Life Insurance

When it comes to life insurance, many people aren’t sure where to begin, and, as is par for many different subjects, prefer to hold off on making a decision until they feel better educated. Life insurance, unfortunately, is one of...

When it comes to life insurance, many people aren’t sure where to begin, and, as is par for many different subjects, prefer to hold off on making a decision until they feel better educated. Life insurance, unfortunately, is one of those subjects, and it shouldn’t be. Purchasing a life insurance policy can help to assuage any fears or worries about how an individual’s family will be cared for following their death.

Popular Life Insurance Policy Types

  • Term: Term life insurance pays a death benefit if a person dies within a pre-defined term, which could be anywhere from one to 30 years. If the insured does not die during that period, the insurer pays nothing. Many individuals choose this option because it offers low premiums and is usually convertible and renewable.
  • Universal: Universal life insurance is a permanent life insurance policy that sets a cash value determined by short-term interest rates. Each policy will have a guaranteed interest rate; while the rates may vary, they will not fall below that guaranteed rate. If an insurer pays additional premiums, they are added to the interest-bearing account.
  • Whole: Whole life insurance is also a permanent life insurance policy that provides death benefits over the entire life of the insured, provided the individual has paid the premiums. The plan also typically includes an investment component similar to universal life insurance; as the policy accumulates a cash value that the insured can borrow against or withdraw. Policyholders usually pay on a whole life insurance policy to age 95 or 100. 

Whole life insurance policies, which cover the entire life of the insured, are also called ordinary life, straight life, or traditional whole life insurance. 

Both Sides of Whole Life Insurance

Your beneficiaries will receive the entire benefit, as long as you have paid all of the premiums. It provides you with a degree of certainty, knowing the exact amount your beneficiaries will be taken care of financially. The policy never expires, and the value never decreases.

Premiums for whole life insurance policies are often preferred because they are fixed. You’ll always know exactly how much you have to pay. 

Part of your premium has a cash value, which you can borrow against or withdraw.

Most whole life policy death benefits, including internal cash value gains, are usually free of income tax. If an insured chooses to cash out a policy before death, any gains are treated as taxable income. The insured can opt to take the money as a loan, though, and then it is not taxed.

Premiums for whole life can sometimes cost as much as six times as premiums for term life insurance, a factor that may influence someone who may be interested in purchasing life insurance. While many insurance companies quote insurance premiums on an annual basis, there are others that allow policyholders to make monthly or quarterly payments, helping to make the premium payment a little more affordable. These policies may also be a better investment in the long run than term life insurance.

It can take between 12 and 15 years to build a sufficient cash value for loans or withdrawals.

Choosing a Whole Life Insurance Policy

It’s important to meet with a financial advisor who can help you determine your life insurance needs. About 60 percent of Americans say they own life insurance, but almost half of them have policies of $100,000 or less — enough to cover funeral expenses, but not usually enough to cover debts or your family’s future financial needs.

A financial advisor will help you factor in different variables that can include:

  • Whether or not you’re married and the size of your family,
  • Pending debt, and 
  • Long-term financial and career goals.

Some people choose to purchase just enough policy to cover funeral and medical expenses; others add in enough to cover paying off a mortgage or other debt, future education for any children, and supplemental income.

Once you’ve analysed your financial needs for the future, the cost will assess some other variables, including your health.

Setting Up Your Whole Life Insurance Policy

Your financial advisor will be able to help you choose the best policyholder for your whole life insurance policy, based on your family’s needs. You’ll need to choose your beneficiaries or the recipients of death benefits. These can include your spouse, adult or minor children, or anyone else you want to receive a portion of your death benefits. You can also designate the percentage each person should receive. Beneficiaries can be changed or updated, as well.

Comparing different policies and different insurance companies can help you find the best whole life insurance policy to fit in your budget now and protect your beneficiaries in the future.