Whole life insurance is a long-term life insurance and savings product. Whole life insurance provides whole life coverage that will financially protect the insured’s dependents in the event of death. A whole life policy will remain in force until the death of the insured. A whole life policy can be terminated early either due to cancellation (surrender) or non-payment of premiums.
With a whole life policy, the premiums paid will generally remain constant and increase the cash value of the policy. The insurer’s mortality charge and administrative fees are taken directly from the cash value of the whole life policy. The insurance company then invests the rest in stocks, shares, and/or bonds. Return on investment goes back to cash value. An excellent benefit of a whole life policy is that the cash value is subject to tax deferral. That is, the policyholder will not have to pay taxes until the money is withdrawn. The insured can access the cash value in the form of a loan.
As long as the premiums for a whole life policy have been paid in full, the death benefit is guaranteed and can be paid in one of two ways. One option is a lump sum payable on death, the other is an additional payment in case of early diagnosis of a serious illness. These payments can be paid in a fixed sum; or it may be based on the performance of the investment portion of the whole life policy.
A variety of products fall under the umbrella of whole life insurance:
- Non-Participating Whole Life: Premiums and face amount remain fixed. There are no dividends.
- Participating Whole Life – This policy will pay dividends, they are performance related and therefore not guaranteed.
- Whole life with indeterminate premium: premiums are adjustable to allow for performance factors; and changes to the mortality charge and the administrative fee.
- Single premium and limited payment Lifetime: premium is paid in a single lump sum; or condensed into a shorter pay period.
To benefit from a whole life policy, it is essential that the premiums are paid in full. It will be for the duration of the whole life policy (except in the case of a single premium and limited compensation). If premiums are not paid, the whole life policy will expire. Additionally, the consumer must realize that whole life insurance is intended to be a long-term product. Typically, it will take at least twelve years before the cash value begins to accumulate value. The rate of return on the investment portion of a whole life policy is rarely competitive with other investment alternatives. However, all life has an additional benefit. It provides protection, which is more important than the rate of return. For this reason, whole life insurance is considered a good investment.
Each person insured with a whole life policy will receive a personalized premium. Some people will be considered uninsurable. When evaluating risk, insurance companies initially divide people into two groups; smokers and non-smokers. Other factors such as health and lifestyle, family history, and occupation will also affect the whole life premium.
The benefits of a whole life policy are summarized below:
- Premiums paid increase cash value. It may be possible to cancel the entire whole life policy early with this cash value.
- You can earn interest or dividends.
- You can opt for fixed and constant premiums.
- The future protection of your family is guaranteed.
- It is not necessary to renew the policy; No more medical evaluations.
- Savings function, which can act as a lender.
- tax incentives. In particular, an insurance trust can be established that pays taxes on your estate from the proceeds of the whole life policy.
The main disadvantage of a whole life policy is the expense. Also, the rate of return is not guaranteed, and for this reason, a whole life policy should not be used as your sole retirement fund. A whole life policy is primarily a life insurance product; the cash value is simply an added bonus. A whole life policy is not suitable for short-term use. It is important to make a financial plan. As long as you can commit to lifetime premiums for a minimum of twenty years and ideally longer; and you won’t need to access cash value to finance living expenses; then a whole life policy might be for you. It is always advisable to consult an experienced financial professional when considering whole life coverage.