What is Whole Life Insurance?
Whole life insurance offers both life insurance and a savings account. It’s a type of permanent life insurance with fixed premiums, death benefit, and cash value.
Cash value, also known as surrender value, is the part of the death benefit received when the policy is canceled. The policy is active for your entire life as long as you pay the premiums.
Whole life premiums are higher than term life premiums but it can be a good investment for those who want guaranteed lifetime coverage.
How Does Whole Life Insurance Work?
Whole life insurance offers permanent coverage for lifetime, providing fixed premiums, death benefits, and tax-free cash value.
The cash value, which grows each year without taxation, can be accessed via loan and withdrawal options.
However, loans against the cash value reduce the death benefit and interest is charged on the loan.
Who is Whole Life Insurance For?
Whole life insurance is chosen for lifetime protection for loved ones and supplementing retirement savings. Whether it’s beneficial depends on personal factors such as age and finances.
Business Owners
Whole life insurance is mostly bought to provide for loved ones in case of the policy holder’s death, but it can also be bought on another person with insurable interest, to protect against financial loss, such as death of a business partner or key employee, and provide income replacement or buy-out funds.
Estate Planning
A whole life insurance plan can help beneficiaries pay for estate taxes if net value is more than the exempt amount at death, especially when you have pension plan and assets that generate income after death.
Tax-Free Investment Opportunities
Whole life insurance offers a tax-free growing cash value as an addition to retirement and investment portfolio, especially when other options like 401(k)s and IRAs are maxed out. The cash value can also be withdrawn or taken as a loan tax-free.
Supporting a Lifelong Dependent
Whole life insurance can provide dependents with financial support for medical bills and expenses after a parent’s death. They offer guaranteed payouts and a cash value account that can be used for quick liquidity.
Anticipate a Need for Long-Term Care
A long-term care rider on a whole life policy allows for accessing death benefit for long-term care costs while you’re alive. Prices and terms may vary by insurer.
Types of Whole Life Insurance
There are two types of Whole Life Insurance policies we recommend:
Simple Whole Life
When you want an opportunity to build cash value that may help you with things such as making a down payment on a house, paying for a wedding or supplementing your retirement income.
- Coverage issued between the ages of 15 days and 80 years — with proceeds paid to age 121.
- Policies with coverage that starts at $15,000.
- A guaranteed death benefit that is generally income tax-free.
- Coverage is guaranteed for your lifetime — or the life of the policy — with a level premium, provided premiums are paid per terms of the contract.
- Automated underwriting — a medical exam may not be required. Issuance of a policy may depend on answers to questions set forth in the application.
Graded Whole Life
You still live independently and take care of yourself — but your health isn’t perfect. A Grade Whole Life policy can help you build cash value so you can prepare for unexpected or final expenses.
- Coverage issued between the ages of 18 and 80 years — with proceeds paid to age 121
- Coverage from $5,000 to $30,000 with a guarantee to accumulate cash value
- A guaranteed death benefit, with a limited payout if the policyholder dies within the first two policy years
- Guaranteed level premiums while the policy remains in force
- Coverage is guaranteed for your lifetime — or the life of the policy — provided premiums are paid per the terms of the contract
- No medical exam — just three simple health questions determine eligibility. Issuance of a policy may depend on answers to questions set forth in the application.
Pros of Whole Life Insurance
Whole Life is simple in that it has a death benefit and a savings account component. Here are the the benefits of Whole Life insurance:
Lifetime Coverage
Whole life insurance covers you for lifetime as long as you pay premiums on time, and you can still access cash value even if the policy lapses, as long as it wasn’t used to pay for premiums.
Inheritable
Whole life insurance allows heirs to inherit the value of the policy tax-free, regardless of the policyholder’s lifespan.
Borrow against Policy
You can borrow against the policy tax-free, up to the cash value amount.
Clear Coverage
Whole life insurance offers fixed premium, interest rate on cash value and unchanging terms.
Baseline Interest Rates
Whole life insurance guarantees a minimum interest rate on cash value growth.
Fee Caps
Whole life caps the maximum fees a company may charge you.
Cons of Whole Life Insurance
While there are many benefits, Whole Life insurance is not for everyone – especially when you consider the cons:
Expensive Premiums
Premiums for whole life insurance are significantly higher than those for term and universal life insurance.
Accumulation Takes Time
Whole life insurance takes a long time to accumulate value, and may not be worth it if payments are stopped early. Consumer Reports suggests it may take 20 years before benefits outweigh other options.
Surrender Penalities
Early withdrawal of cash value may incur a penalty due to the surrender period, typically in the first few years of the policy.
Minimum Balance Needed for Borrowing
A minimum balance, typically around $10,000, and a specified policy tenure, usually at least five years, are required to qualify for a loan against your policy.
Difficult to Evaluate Companies & Fees
Insurance companies are not obligated to reveal management fees, rate of return, sales commissions and breakdown of premiums, making it difficult to hold them accountable.
Whole Life Insurance FAQs
What is whole life insurance?
Whole life insurance is a type of permanent life insurance that provides coverage for the duration of the policyholder’s life, as long as premiums are paid. It also includes a savings component, known as cash value, which accumulates over time.
How does the cash value component work?
The cash value component of whole life insurance is a savings account that grows over time. Premiums paid into the policy not only cover the cost of insurance, but also contribute to the cash value. Policyholders can use the cash value to pay premiums, borrow against the policy, or withdraw cash.
How does whole life insurance differ from term life insurance?
The main difference between whole life insurance and term life insurance is that whole life insurance is permanent, while term life insurance provides coverage for a specified term, usually 10-30 years. Whole life insurance also has a cash value component, which term life insurance does not.
How is the premium for whole life insurance determined?
The premium for whole life insurance is determined by a variety of factors, including the policyholder’s age, health, and the amount of coverage requested. Premiums are typically higher for whole life insurance than for term life insurance because the coverage is permanent and includes the cash value component.
Can I borrow against my whole life insurance policy?
Yes, most whole life insurance policies allow policyholders to borrow against the cash value component of the policy. However, there may be restrictions, such as a minimum balance requirement, and policyholders will typically be charged interest on the loan.
Can I withdraw cash from my whole life insurance policy?
Yes, policyholders can withdraw cash from the cash value component of their whole life insurance policy, but doing so may decrease the death benefit and may also incur penalties, such as surrender charges, if done in early years of the policy.
Are there any tax benefits to whole life insurance?
Yes, the cash value component of a whole life insurance policy may grow tax-deferred, and policyholders may be able to borrow against the policy tax-free. Death benefits from a whole life insurance policy are also typically paid to beneficiaries tax-free.
How do I know if whole life insurance is right for me?
Whole life insurance may be a good option for people who want permanent coverage and the potential to accumulate cash value over time. However, it is important to consider your overall financial goals and needs before purchasing any type of life insurance. It may be beneficial to consult a financial advisor to determine if whole life insurance is the best fit for you.