Like it happens with many others, buying life insurance can be a first-time experience for you. Often the first experience remains to be the last one as well. You do not happen to buy it often. Once you decide, you hover over two choices to get either: term life insurance or whole life insurance . But this may seem to give you a scary catch-22 feel. With a view to easing your understanding on whole life insurance, we go into essential details of the policy.
Whole Life Insurance: the Most Popular Choice
Contrary to popular belief, whole life insurance remains to be a top sale. For example, Insurance Information Institute (iii.org) says approximately 6.4 million individuals in the U.S. bought term life polices in 2003. In contrast, 7.1 million buyers chose whole life policy for themselves in the same year. With regard to rise in retail premium in the U.S. in 2016, LIMRA’s Ashley Durham identifies whole life insurance to be the ‘instrumental’ factor. According to Wink, in the first quarter of 2017, whole life sales totaled $933,180,250 in the U.S.
The above statistics indicate people find whole life insurance to be their best bet.
But you need to understand your bet in view of your situation. After all, life insurance is not something you can buy now and return soon.
So, choosing whole life insurance demands more concentration for many various reasons.
Life Insurance: Your Only Best Choice
We would like to remind you of the basic concept of life insurance first. In brief, it is an arrangement of financial protection for people who depend on you. What makes you think of it is your fear of their future past your death. The scenario looms gloomy when you see you need time before you can fix things. You cannot be sure if you will have it. None can be. In such a situation, life insurance can be the only and best choice for you.
Insurance Is a Deal
Your insurance policy is a deal you sign with one of the life carriers working nationally or in your state. You agree to pay a cost, known as premium, at regular intervals to the insurer. In return, they promise to divert the buy, usually a large sum of money, to your heirs upon your death. The amount comes well-defined in the contract and it should suffice your dependents’ future needs.
This is the essence of life insurance.
It’s No Straightforward Action
However easy it may sound, making a purchase of life insurance is not a straightforward action.
You have contrasting alternatives to choose from.
Two Major Options
Insurers offer you two major options with regard to the duration of the protection. One is for temporary protection and the other is for lifelong protection.
When you choose the temporary protection, you buy the kind of program known as term life insurance. So, your deal for 10 years will defend your nominees for those particular 10 years. The deal works in a: from 20 August, 2017 to 20 August, 2027 way.
On the other hand, if you choose your protection to work for your longevity, you opt for whole life insurance. Thus, lifelong protection is the fundamental aspect of whole life insurance. It also bears the name permanent life insurance or perm insurance.
Where Whole Life Departs
You have already understood what whole life insurance is. And you know, besides lifetime protection, there is more to the concept of whole life insurance policy. It provides to you what is popularly known as cash value or living benefit. The insurance company invests part of your premiums into the money market to generate profit and shares it with you. So, permanent life insurance is a two-way ticket for you: whole life protection and income generation.
For this aspect of the whole life insurance, insurers love to call it the cash value insurance.
Common Features of All Whole Life Insurance
Whole life insurance does not work in a unique way. It falls in categories and sub-categories. But they all have the following common features:
Your insurer divides your premiums into two parts: insurance and investment.
They use the insurance part to build the death benefit for your dependents.
For you there is a maturity age the end of which brings you the maturity benefit. Living up to the maturity age produces the benefit.
When you pass away ahead of the maturity age, your dependents receive the death benefit.
The part of premiums that they invest generates the cash value which they share with you.
No matter the investment makes a profit or loss, you receive minimum guaranteed interest.
All the three types of benefits: cash value, death benefit and maturity value, are tax-free.
The insurer offers you access to the cash value.
How the Cash Value Works
Part of the premiums goes to build the death benefit which your nominee, aka beneficiary, receive upon your death. The rest goes to build savings. It is that simple. Your insurer invests your money into the money market—bonds and mortgages. The profit that comes up keeps growing with time. It builds the said cash value. The cash value comes to you minus the management costs which the insurer ‘cuts off’ from your portfolio. You receive the rest.
You may want to know what happens if the investment incurs loss in the money market. Good news is usually an all life insurance policy offers a minimum guaranteed interest rate. Whatever happens in the money market, you receive the guaranteed interest.
You may also wonder if you receive more if there is more profit but you have chosen the minimum interest. Well, most whole life insurance policies usually speak of paying dividends. This holds promise of ‘the more the income, the larger your share.’ Though there is no guarantee, instances of dividing paying are not scarce.
How You Can Use Cash Value
If you read whole life insurance portfolio, you will see you have full access to your cash value. You can:
Cash it out.
Borrow from it.
Channel it to pay your premiums.
However, it is important to understand that the cash value money belongs more to the death benefit than to you. Any borrowing incurs interest. And if there is outstanding loan it affects the death or maturity value.
Types of Whole Life Insurance Policies
Despite the core similarities mentioned above, there are various ways whole insurance works. For making the right choice, it is important to know about what are the types of whole life insurance policies. Here are the 5 major types of whole life insurance that you need to initially have ideas about:
Ordinary Whole Life Insurance Policy
The ordinary whole is the parent type of whole insurance. This policy provides you lifelong protection in exchange of regularly paid premiums.
There is the death benefit whenever you die. If you live up to a hundred years, you receive the maturity value. Besides, there is the cash benefit which your insurer makes from investment of your premiums to the money market.
In the ordinary whole life insurance your premiums are fixed.
Universal Life Insurance Policy
Ideally similar to ordinary whole, flexibilities make universal whole life insurance a popular type. You can make no alterations in the default functionalities of your ordinary whole policy. But universal whole allows you to suit your premiums and coverage to need.
The policy is also known as adjustable whole life insurance policy.
Variable Life Insurance Policy
While the universal life insurance policy is premium-flexible, the variable whole life insurance policy is investment-flexible. When you are on either of the above policies, you cannot have a say with regard to the investment. But a variable whole life insurance allows you to be a decision maker in this regard. You have a range of money market sub-accounts to choose wherein you want your money to go for investment.
This freedom of choice, however, comes with the responsibility on your shoulder for the loss, if not for the profit.
Universal Variable Life Insurance Policy
It is a combine of the two: the universal and the variable. So, it offers the flexibilities of the universal as well as the freedom of choice of the variable. Consequently, you can make changes not only in coverage but also choose where you want to invest your money.
Despite combining flexibilities of both the universal and variable plans, variable universal whole life insurance works in a much more complex way than other policies.
Simplified Whole Life Policy
Perhaps you have heard about funeral advantage life insurance policy or burial insurance. This policy falls in the category of simplified whole life insurance policy and sells mostly online. People between the ages of 40 and 85 are eligible to purchase it to meet their last rites expenses. They pay until their end days to usually receive a death benefit of $2,000 to $25,000. It is an aberration of the whole life insurance in that it lacks the cash value component. However, the policyholder may have an interest-paid loan Compared to income from other channels, permanent life policy brings in less profit. access to the premium deposit.
The death benefit of this insurance type is often much less than the premiums paid.
Pros of Whole Life Insurance
Promises Longest Protection
If you go for term life insurance, your protection works for the said ‘term’, the certain years you choose. Once your term is over, your folks go out of insurance. But the protection of whole life is valid literally for so long as you live.
Saves You from Penalty
At the end of your term policy, you may want to extend insurance protection. Coming under protection once again can be both difficult and expensive. The reasons are your health by then declines and prospects of death increase. Whole life insurance is the best choice for you when you think of the penalties well ahead.
Tax-free and No-risk Passive Income
When you buy a whole life insurance policy, you actually enter into money business like a sleeping partner. It brings in profit for you in the form of interest. Your insurer pays you a minimum interest no matter the investment incurs a loss or makes a profit. Also, your income is tax-free.
A Win-Win Policy
A buyer of term life policy does not get even a cent when the policy goes off. But with permanent life insurance, you not only receive cash value, but also leave death benefit to your folks.
Cost May Go Downward
The cost of all life insurance remains level throughout your life. As cash value rises over time and you send it to pay your premiums, your cost gradually lowers.
You Can Use Cash Value
It is an advantage with permanent life insurance that you can use cash value. Though borrowing from cash value is not a good option, it comes to use when you need money.
Cons of Whole Life Insurance
Can Be Terribly Expensive
Whole life insurance is not an Everyman’s policy. Because of having the investment component, it can be too expensive for you to buy. While term life insurance costs you in tens, whole insurance takes in hundreds.
Depending on your age, gender, health condition, legal history, life-style and coverage, premiums may be beyond your grasp.
Poor Investment Portfolio
It is sweet to think of getting some extra dollars sitting back at home, relaxed and closed-eyed. As whole life insurance offers you the opportunity, you might be thinking of grabbing it. Unfortunately, the so-called guaranteed interest that you have the promise of is much less than non-insurance investments.
No Guaranteed Dividend
Dividend is the share of profit that the insurer is reward you with. It is a bonus payment beyond the minimum interest that you surely get. Dividend makes the whole life policy alluring. But there is no guarantee that you will receive it.
Cash Value Can Be Slow
Although whole life policy builds cash value, it takes pretty good time. It does not start to be visible until the initial two or three years pass.
Projected Amount Vs. Real Money
The general projection of high returns is often hypothetical. Profit from premiums of several hundred dollars naturally takes years to accumulate something really visible. An array of different costs that the insurer cuts off from you makes things still worse. So, the general projection and the real accumulation fall widely apart.
You Cannot Withdraw Money In Need
You may need money any time. If you need money right away, you cannot get it without the official hassles. You need to go through a process that tires you out.
Borrowing Money Affects Your Heirs Negatively
Surely, it is a good feature of the whole life insurance that you can borrow money from your cash value. But it may not be a good decision at all. Unless you pay the money back, it is going to negatively affect your heirs. Outstanding loans come off from the benefit payment.
Tax-free Vs. Interest-Induced Withdrawal
Though your loan comes tax-free, it starts accruing interest from the very day you take out the money. The rate is always higher than what they pay you for the guaranteed interest.
Surrender May Have Income Tax
While the benefits of whole life insurance are tax-free, surrendering your policy is not. If you happen to have to surrender the policy, you lose a good amount. You not only pay official charges but also income taxes.
An Ocean of Fees Taken Off
The insurance company takes off various fees and charges that you do not initially know of. Finally, you discover that you have petted a white elephant.
Because terms and conditions of a policy are company specific, all the disadvantages may not generally apply to your policy.
What Life Insurance Mentors Say
Many criticize whole life insurance for poor returns from the investment portfolio. While the criticisms weigh well, they seem to put more weight on the investment than the insurance. If it is insurance that you focus on, whole life insurance can be a good choice for you. After all, unlike its competitor term life, it provides you both insurance and investment options. There is something in your bowl in the end. You also do not run the risks that may lurk in non-insurance portfolios.