What is Whole Life Insurance?

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When deciding to purchase life insurance, you will need to decide to choose term or whole life insurance. To help you determine if whole life insurance would work for you, here is a comprehensive explanation of what whole life insurance is.

Whole life insurance explained

Whole life insurance, a type of permanent life insurance. As compared to term life insurance, whole life lasts your entire life and premiums remain the same.

Whole life is the most popular type of permanent life insurance. Other types including variable, universal and variable universal.

Like term life insurance, whole life guarantees a death benefit payout, but it also includes a cash value component. In a whole life insurance policy, the cash value acts as a savings account. As you pay your premiums, your death benefit decreases and your cash value (savings) increases. The cash value grows until the whole policy is cash value.

Learn moreHow does life insurance work?

Who should buy whole life insurance

Three of the main reasons to purchase a whole life insurance policy are, you want:

  1. Premium fees stay the same
  2. Life insurance coverage throughout your life
  3. A cash value tied to your policy – tax free

Having your payments stay the same is appealing for those you are not in the best health. As you age, you may be concerned that renewing a policy would increase your premium fee. However, a major drawback of whole life insurance is that the premiums fees are significantly higher than term life insurance policies – up to ten times the cost. For that reason alone, most families purchase term life insurance policies.

Most people choose whole life insurance for the cash value component. You may be asking why would you want cash value with your life insurance policy?

As you pay your premiums, you can pull money from your cash value tax-free for retirement or for other financial needs. You can also take out a loan against the policy tax-free however, you will be charged interest by the insurer. Essentially, the cash value acts as a forced savings strategy for your family.

Though the cash value can seem appealing, there are quite a few drawbacks to whole life insurance policies.  Here is a simplified pros and cons list for whole life insurance:

PROSCONS
Premiums stay same throughout lifetime; never expiresExpensive premiums compared to term life - up to 10 times more
Cash value - helping with personal savings strategySavings are tied up - cannot diversify and interest you receive is often less than other forms of investment
Guaranteed death benefit throughout lifetimeHigh cost means that often people buy less and surrender the policy early
Cash value can be withdrawn or borrowed
Policies are often more complicated than term. You need to vigilant when looking at the surrender value and riders
Can be purchased with no medical exam (at a higher cost)

Whole life insurance works for people with more complicated financial situations.

These individual would require permanent life insurance, such as having a disabled child. Also, for those you can afford the high premiums and have maxed out your tax-deferred savings, whole life would be good option.

This type of life insurance is also often applicable if estate tax is a concern. The cash value is often used to cover estate tax allowing beneficiaries to obtain their full inheritance.

>> Tip: Be cautious with insurers

Whole life insurance is only worth it for an individual with particular financial needs. However, insurers love this policy and of course, love to the sell these policies. As your cash value increases, this risk for the insurer decreases. This type of insurance policy is safer for insurers and is why they want people to purchase it.

  • For example, your death benefit is $30,000. Say at the time of your death, there is $10,000 of cash value accumulated, the insurer will only have lost $20,000. Their amount of risk when the policy was issued was $30,000 but at the event of the policyholder’s death, it is $20,000.