Whole Life Insurance
Whole Life Insurance - What It Is & How It Works
Learn everything about whole life insurance, including how it works and how to know if it’s the right one for you. Discover the benefits today!Get your free quote
- Whole life insurance is a type of insurance that covers you for the duration of your policy from the day you buy it until the day you die, as long as you continue to pay the premiums
- It includes a savings component called the cash value, which grows over time as you pay premiums and can be accessed through policy loans or withdrawals
- The premiums are typically higher than term life insurance premiums
- You can build the cash value of your whole life insurance policy by consistently paying premiums, paying premiums in a lump sum, increasing premiums, or choosing a policy with a higher interest rate
- You can access the cash value of your whole life insurance policy through policy loans, withdrawals, or by surrendering the policy. It is important to carefully consider the potential consequences of accessing the cash value before doing so
What is whole life insurance?
Whole life insurance (also known as permanent life insurance) is a type of life insurance that covers you for the duration of your policy from the day you buy it and put it in force until the day you die.
Whole life insurance, along with universal life insurance, are considered permanent because they don’t have a set expiration date. As long as the policyholder continues to pay the premiums, the policy will remain in effect. This makes whole life insurance an attractive option for individuals who want to ensure that their loved ones will be financially protected for the rest of their lives.
How does whole life insurance work?
In addition to providing life insurance coverage for the policyholder’s lifetime, whole life policies also include a sort of savings component, called the cash value. Part of the premium is invested and generates cash value over time, as you put money into a whole life policy. This cash value may be accessed during the insured's lifetime in one of two ways: withdrawing or borrowing against it.
Whole life policies generally have higher premiums than term life insurance policies, as they offer a lifetime insurance coverage and an accumulated cash value. However, the premiums for a whole life policy are typically fixed, meaning they do not increase with age.
When the policyholder passes away, the death benefit is paid out to the designated beneficiaries. The death benefit can be used to cover funeral expenses, outstanding debts, and other financial obligations.
Understanding cash value
How do I build cash value?
The cash value component of a whole life insurance is a portion of the premiums paid by the policyholder that is set aside in a savings account. The value grows over time as you continue to pay premiums and can be accessed through policy loans or withdrawals.
There are several ways in which you can build the cash value of your whole life insurance:
- Pay premiums consistently: The most straightforward way to build cash value is having your premiums paid on time each month or year. Each payment will contribute to the growth of the savings component.
- Pay premiums in a lump sum: You may choose to pay your premiums in a lump sum rather than monthly or annually. This can help to build the cash value faster, as a larger sum of money is being contributed at once.
- Invest in a policy with a higher interest rate: Whole life insurance policies may offer different interest rates for their cash value component. You can select a policy with a higher interest rate in order to build the cash value faster.
It's important to note that the cash value of a whole life policy is not guaranteed and may fluctuate based on market conditions. You should carefully consider the terms and conditions of your policy before making any decisions about how to build the cash value.
How do I access whole life cash value?
There are several ways in which you can access the cash value of your whole life insurance:
1. Policy loans
You can borrow against the cash value of your policy by taking out a policy loan. Policy loans are typically available at a low interest rate and do not require collateral. You are responsible for repaying the loan, including any interest, at a later date.
You may also be able to make withdrawals from the cash value of your policy. Withdrawals may be subject to certain restrictions and may impact the policy's death benefit and cash value. It's important to carefully consider the potential consequences of making a withdrawal before doing so.
3. Surrendering the policy
In some cases, you may choose to surrender your policy in exchange for the cash surrender value. This option may be suitable for those who no longer need the policy or who need access to the cash surrender value for a specific purpose. It's important to note that surrendering the policy will cancel the coverage and you’ll no longer be protected by the insurance.
Things to consider when looking into whole life insurance
The guaranteed death benefit is the amount of money that is paid out to the designated beneficiaries upon the policyholder's passing. It is important to carefully consider the amount of life insurance coverage needed and to choose a death benefit that is appropriate for the policyholder's needs.
Some whole life policies may offer dividend payments to policyholders. Dividends are typically paid out of the insurance company's profits and may be used to pay premiums, increase the death benefit, or be taken as cash. Dividend payments are not guaranteed and may fluctuate based on the financial performance of the insurance company.
Non-taxable death benefit
The death benefit paid out under whole life insurance is typically non-taxable, meaning that it is not subject to income tax. This can be a significant benefit for the policyholder's beneficiaries, as it can help to cover expenses related to the policyholder's passing without being reduced by taxes.
Life insurance riders are additional endorsements or provisions that can be added to your whole life insurance. Common riders include long-term care coverage, accidental death coverage, and child term rider coverage. Policyholders should carefully consider the terms and conditions of any riders before adding them to their policy.
Life insurance company
It is important for policyholders to carefully research and choose a reputable life insurance company. Policyholders should consider the financial stability of the company, the terms and conditions of the policy, and the customer service provided. Policyholders should also review their policy periodically to ensure that it meets their needs and to make any necessary changes.
The history of whole life insurance
During World War II, the life insurance industry played a significant role in providing financial protection for families affected. Many soldiers took out life insurance policies to provide for their families in the event of their passing, and life insurance companies worked to pay out death benefits to the families of those who were killed in action.
After the war, the life insurance industry continued to grow and evolve as a financial tool for individuals and families–In the 1980s, banks began to show an interest in the life insurance industry and offered life insurance products to their customers as a way to diversify their product offerings and generate additional revenue.
Today, life insurance is a common financial product that is used by individuals and families to provide financial protection for their loved ones in the event of their passing. Whole life insurance, or permanent life insurance, is a type of insurance policy that provides coverage for the entirety of the policyholder's life and includes a savings component known as the cash value.
Why should I get whole life insurance?
One of the main benefits of whole life insurance is that it provides coverage for the entirety of the policyholder's life. This can provide peace of mind to policyholders and their loved ones, as it ensures that there is a financial safety net in place for the rest of the policyholder's life.
Whole life insurance policies also include a savings component known as the "cash value." The cash value grows over time as the policyholder pays premiums and can be accessed by the policyholder through policy loans or withdrawals. This can provide policyholders with a source of additional financial security.
The premiums for this type of life insurance are typically fixed, meaning they do not increase with age. This can be a significant advantage for policyholders, as it allows them to budget for the cost of their coverage over the long term.
Non-taxable death benefit
The death benefit paid out is typically non-taxable, meaning that it is not subject to income tax. This can be a significant benefit for the policyholder's beneficiaries, as it can help to cover expenses related to the policyholder's passing without being reduced by taxes.
Whole life insurance may also offer policyholders the ability to customize their coverage through the use of riders. Riders are additional endorsements or provisions that can be added to a policy to provide additional protection or coverage.
Types of whole life insurance
Traditional whole life insurance
Traditional whole life insurance is the most common type of whole life insurance. It provides coverage for the entirety of the policyholder's life and includes a savings component known as the cash value. Premiums are typically fixed and the policy accumulates cash value over time.
Modified whole life insurance
Modified whole life insurance is a type of whole life insurance that combines features of both term life insurance and whole life insurance. It provides coverage for a set period of time, typically 20 to 30 years, and includes a savings component known as the cash value. Premiums are typically lower than traditional whole life insurance but may increase over time.
Graded premium whole life insurance
Graded premium whole life insurance is a type of whole life insurance that has lower premiums for the first few years of the policy. The premiums may then increase depending on the cash value growth. This type of policy is often used as a way to provide coverage for individuals who may not qualify for traditional whole life insurance due to health issues.
Variable whole life insurance
Variable whole life insurance is a type of whole life insurance that allows policyholders to invest a portion of their premiums in a variety of investment options. The cash value growth is then based on the performance of the investments. This type of policy carries more risk than traditional whole life insurance but may offer the potential for higher returns.
Whole life vs. term life - Which is better?
When it comes to choosing between whole life insurance and term life insurance, there is no "right" or "wrong" answer. The type of policy that is best for you will depend on your individual needs and financial circumstances.
While whole life insurance provides coverage for the entirety of the policyholder's life, term life provides coverage for a set period of time, typically 10, 20, or 30 years. It does not include a savings component–but premiums are typically lower than whole life insurance, which can be more advantageous.
In fact, people usually need both types of insurance to have the right protection for their family. Whole life insurance protects the lifetime protection, and term life protects their short term (mortgage, college tuition, children lifestyle).
That's why it's important to carefully consider your individual needs and financial circumstances before choosing your life insurance. Here are some questions to help you out:
- How long do you need coverage for?
- How much coverage do you need?
- What is your budget for premiums?
It might also be helpful to speak with a financial advisor or insurance agent to help you determine the best life insurance coverage for your situation.
Pros and cons of whole life insurance
Whole life insurance, also known as permanent life insurance, offers several benefits to policyholders, but it also has some drawbacks to consider:
- Lifelong coverage: One of the main benefits of whole life insurance is that it provides coverage for the entirety of the policyholder's life. This can provide peace of mind to policyholders and their loved ones, as it ensures that there is a financial safety net in place for the rest of the policyholder's life.
- Cash value: Whole life insurance also includes a savings component known as the "cash value." The cash value grows over time as the policyholder pays premiums and can be accessed by the policyholder through policy loans or withdrawals. This can provide policyholders with a source of additional financial security.
- Fixed premiums: The premiums for whole life insurance are typically fixed, meaning they do not increase with age. This can be a significant advantage for policyholders, as it allows them to budget for the cost of their coverage over the long term.
- Non-taxable and guaranteed death benefit: The death benefit paid out under a whole life insurance policy is typically non-taxable, meaning that it is not subject to income tax. This can be a significant benefit for the policyholder's beneficiaries, as it can help to cover expenses related to the policyholder's passing without being reduced by taxes.
- Higher premiums: One of the main drawbacks of whole life insurance is that it typically has higher premiums than term life insurance. This can make it more expensive for policyholders to maintain coverage over the long term.
- Limited flexibility: Whole life insurance may offer limited flexibility in terms of coverage amount and length. Policyholders may not be able to adjust their coverage to meet changing needs or financial circumstances.
- May not offer as much coverage: In some cases, whole life insurance may not offer as much coverage as term life insurance for the same premium. This can be a disadvantage for policyholders who need a higher level of coverage.
The main difference between whole life and universal life insurance
Both types of policies also have a cash value component that grows over time and can be accessed by the policyholder through loans or withdrawals.
One main difference, though, is the premium payment structure: Whole life insurance premiums are fixed and do not change, while universal life insurance premiums are flexible and can be adjusted by the policyholder within certain limits.
Another difference is the way the cash value grows. The cash value of whole life insurance grows at a fixed rate, while the cash value of a universal life insurance policy is based on the performance of underlying investments, which can fluctuate.
It's important to carefully consider your financial goals and needs when deciding between whole life and universal life insurance, and you may want to speak with a financial professional to determine which type of policy is best for you.
Life insurance beneficiaries
You'll choose a beneficiary to receive the death benefit when you buy a policy. You don't have to divide the death benefit equally among beneficiaries. You may set each percentage as desired, such as 75% for one and 25% for the other.
It's also a good idea to name one or more contingent beneficiaries. These are your fallback option if all of the primary beneficiaries die before you do.
Designating beneficiaries, as well as keeping your designation up to date with your intentions, is a crucial responsibility. Regardless of what your will says, the life insurance companies are contractually obligated to pay the beneficiaries named in the policy. It's a good idea to check once a year to make sure your beneficiaries still represent your preferences.
How to claim the death benefit?
When you die, your beneficiaries can claim the death benefit which can be received as a one time tax-free payment or recurring payments. In all cases, the death benefit is received without your beneficiaries having to pay out taxes.
The main benefit of whole insurance is that it will be in effect until your death, whereas term insurance only lasts till the end of your term. You won't be able to outlive the whole life coverage as long as you pay your premiums.
However, many policies provide a payout only equal to the death benefit, regardless of how much cash value you've built up. When you die, the cash value reverts back to the life insurance companies. Also keep in mind that outstanding loans and previous withdrawals from your cash value will decrease the amount paid out to your beneficiaries.
Depending on the circumstances, some plans let you buy a rider that gives both your beneficiaries the death benefit as well as the accumulated cash value. Because you're responsible for a larger payout, this clause raises annual premiums by ensuring that you pay extra.
How much does whole life insurance cost?
While some of the cash value features and whole insurance's permanently appear to be appealing, for many consumers, permanent life insurance is simply out of reach.
Term life vs. whole insurance costs are frequently compared by individuals looking for life insurance. Because the policies are so different, an apples-to-apples comparison isn't feasible. That being said, you can be positive that permanent life insurance will always cost more than term life insurance. This difference in price, therefore, makes whole life insurance much less appealing to the majority of people with insurance needs.
Factors in whole life insurance cost
The amount of coverage you pick will impact your rate, as well as the following:
- Age (permanent life insurance gets significantly more expensive as you get older)
- Height and weight (your premiums are affected by your body mass index)
- Previous and current health conditions
- The health history of your family
- Usage of nicotine (that includes anything containing nicotine)
- Substance abuse
- Criminal record
- Dangerous Lifestyle (such as skydiving, rock climbing, etc...)
Know what you’re getting into
Finally, whole life insurance can be beneficial in certain situations, but it isn't right for everyone. Whole life offers additional perks that may often be found by combining your retirement and investment accounts with term life insurance. Before purchasing any insurance policy, make sure you understand the alternatives available and the special provisions each one includes.
Frequently asked questions
How do I find cheap whole life insurance?
To find cheap whole life insurance, you can compare quotes from multiple insurance providers to find the most affordable option. You can also consider purchasing a smaller policy and supplementing it with other forms of insurance, such as term life insurance or disability insurance. It's also a good idea to consider your overall health and lifestyle when shopping for life insurance, as these can impact your premiums. For example, non-smokers may be able to secure lower premiums than smokers.
Can I customize my whole life insurance policy with riders?
Many whole life insurance policies offer the option to customize the policy with riders, which are additional provisions that can provide additional coverage or benefits. Examples of common riders include accidental death coverage, long-term care coverage, and critical illness coverage. It's important to carefully review the available riders and consider which ones may be appropriate for your individual needs and circumstances.
Can I convert my term life insurance policy to a whole life insurance?
In some cases, it may be possible to convert your term life insurance into a whole life insurance policy–This can be a good option if your circumstances or needs have changed since you purchased the term policy. It's important to note that converting a term policy to a whole life policy may result in higher premiums. It's a good idea to discuss your options with a financial professional or insurance agent to determine the best course of action.
Can I cancel my whole life insurance?
You can (in most cases) cancel your whole life insurance policy at any time during your contract, just know that you may not get back any premiums you've paid. You'll also forfeit any cash value that grew into your policy