What is whole life insurance?
Whole life insurance is a permanent life insurance policy that provides insurance protection for the life of an individual. There are two types of life insurance policies: term insurance, which is temporary, and permanent insurance, which lasts for the life of the insured. Term insurance policies only pay a death benefit if the insured dies during the policy period. As a result, whole life policies are more expensive than term policies.
Whole life policies also have a cash value component. The premiums you pay for a permanent policy cover the cost of the life insurance policy and constitute a cash value (savings fund) within the policy. The amount of cash value depends on the premium paid, the term of the policy and the rate of interest earned by the policy. The cash surrender value is different from the death benefit. Term life insurance policies do not offer cash value.
Benefits of whole life insurance
Whole life insurance offers several advantages. Unlike most financial products, whole life insurance offers certain guarantees to policyholders and beneficiaries.
A whole life insurance policy never expires as long as you continue to pay the premiums. Even if your health declines, you are guaranteed to be covered, regardless of when you die. For retirement planning, this means that you are guaranteed to have life insurance in your retirement years, at a fixed cost.
Guaranteed level premium
Your premiums will remain the same for the life of the policy. It will never go up. This makes the premium more affordable in the long run. Other types of policies may adjust their premiums over time as the insured ages or their health declines.
Guaranteed death benefit
As long as you have no loans on your life insurance policy, the death benefit amount (the amount paid out to your beneficiaries) is guaranteed never to decrease. You can have peace of mind knowing that a guaranteed amount of money will go to your beneficiaries or causes you care about.
Guaranteed cash value
Whole life policies have a cash value that is guaranteed to grow at a fixed rate each year. This amount depends on the policy you obtain and the insurer through which the policy is underwritten. Unlike the stock market, which can be volatile, the cash value of a whole life insurance policy will increase each year without fluctuating.
In addition to cash value growth, many life insurance companies also pay a dividend. You can receive the dividend in cash, use it to pay the premium or reinvest it in your policy. Although dividends are not guaranteed, these payments are a way for mutuals to share profits with policyholders.
Whole life insurance policies have several tax advantages. The death benefit is tax-free for your beneficiaries. Cash value growth and any dividends you may receive are also tax-deferred. This means that the cash component of your whole life insurance policy grows tax-free. You will only have to pay tax on the winnings if you surrender your policy and withdraw the money. Plus, you can borrow against your cash value tax-free as long as you repay the loan.
Life insurance riders
Some policies allow you to add an endorsement or endorsement to your policy. A popular rider is a long-term care or living benefits rider. This rider allows you to use your death benefit for long-term care needs. What you don’t use will go to your beneficiaries as a death benefit.
Another popular rider is the Waiver of Premium. This endorsement waives premium payments if you are unable to make payments due to a qualifying event. The endorsement guarantees that your policy will remain in force even if you do not pay the premiums.
Cost of Whole Life Insurance
One of the disadvantages of whole life insurance is its cost. It is expensive compared to a term life insurance policy. You can buy a term policy with a much larger death benefit for the same cost as a whole life insurance policy. 60% of new individual contracts are permanent life insurance contracts, but they represent only 28% of the total face amount of all new contracts.
The average cost of a $250,000 10-year life insurance policy is generally between $15 and $17 per month for a healthy 40-year-old male. Life insurance generally costs more for men due to their shorter lifespans and the fact that they are more likely to have dangerous jobs or lifestyles.
A $250,000 whole life insurance policy on a healthy 40-year-old man costs $327.99 a month, more than 20 times the cost of a 10-year term insurance policy for the same amount of benefits. That’s why some financial experts say it may be better for some people to buy term life insurance and invest the difference in cost.
Who is whole life insurance for?
While whole life insurance isn’t right for everyone, there are several instances where whole life insurance makes sense. Whole life may be preferable for those who need money to pay property taxes, want guaranteed protection and/or own a business.
If your family has a history of health issues and you think you may not qualify for a life insurance policy later in life, a whole life insurance policy may be right for you. This can give you peace of mind in case you cannot qualify for life insurance as you get older.
High net worth
Individuals with high net worth can use whole life insurance policies as part of their overall financial plan to defer taxes. The cash value grows tax-free, and they can borrow against the value of the policy tax-free as long as they pay it back.
Pay property taxes
The estate tax exemption is $12.06 million in 2022. If your net worth is greater than this, purchasing a whole life insurance policy may be a good idea to help your beneficiaries pay inheritance tax.
For children with special needs, a whole life insurance policy can provide guaranteed funds to help care for them.
Life insurance can be used for business partners. The death benefit can be used to buy each other’s shares in the business after the death of one of the partners. This is called a buy-sell agreement.
A whole life insurance policy is not the ideal way to invest and save money. But if you’re struggling to save money, the cash value component can be a useful savings tool. A portion of the premiums is used to fund your cash value. Remember that most policies have a minimum number of years that you must keep the policy before you can access your cash value.
Guaranteed death benefit
A duration policy ends after a defined duration limit. The longest term is usually 30 years, which means the policy will expire after that. If you want another life insurance policy, you will need to submit a new application. Life insurance costs rise dramatically for seniors. So if you want your beneficiaries to get a guaranteed death benefit without worrying about reapplying for life insurance, then whole life may be a better bet.
How to Choose the Right Whole Life Insurance Company
There are many companies that offer whole life insurance. Your goal should be to find the life insurance company that offers you the best coverage and the best terms at the right price. Every company has its advantages and disadvantages, so here are the things to consider when choosing a company.
Financial strength of the insurer
The guarantee offered by an insurer depends only on its ability to pay. A whole life insurance policy is long term, so you want it to be there to pay the death benefit. AM Best is a well-known insurance rating agency that rates companies on a scale of A++ (superior) to D (poor). Ratings are based on an insurer’s ability to pay claims, debts and other financial obligations. Look for an insurer with at least an A- (Excellent) rating. The higher the rating, the greater the ability to meet financial obligations and pay claims.
Insurer complaint file
The National Association of Insurance Commissioners (NAIC) provides information for insurance commissioners to effectively regulate the industry and protect consumers. They publish a complaints index that tells you the share of insurance company complaints based on their size. After searching for the insurance company, select “click for report options”, then select “complaint trend”. The national complaints index is 1. This means that a company with a complaints index of 2 has twice as many complaints as expected in the market. The closer to 0, the better the insurance company’s complaint index.
How to qualify
There are different types of whole life insurance policies. Find the coverage and terms that best suit your needs. Not all insurers offer a policy that is right for you. It is best to check how difficult it is to apply for coverage and what the insurer requires of an applicant. Some will require full medical tests, while others may offer a no-exam life insurance policy and only require you to complete a detailed medical questionnaire.
How does the company treat customers? Do they get back to them quickly? Is it easy to access cash value? Some insurers have agents while you can purchase some policies online. You will want to make sure the company is easy to work with. JD Power surveys customer satisfaction and publishes the US Individual Life Study annually. The study measures the experiences of customers of the largest individual life insurance companies in the United States. The score is out of 1000 and the higher the score, the higher the overall satisfaction index ranking.
Compare insurance companies
Rates and conditions of coverage vary depending on the insurer. Some insurers may be more competitive in some areas than others. Get quotes and policy terms from different companies and compare them to make sure you get the best value.