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This type of life insurance provides permanent life insurance protection for the remainder of your life. Most policies will cover you until you reach 100. A whole life policy will never lapse, as long as you pay your premiums every year. In addition to providing permanent coverage, whole life insurance includes the ability to save. You can build cash value and defer paying taxes on any money earned. The life insurance company will invest a portion of the premiums you pay in order to increase the amount of savings. Your return on investment is then added to your policy’s savings portion in order to increase your policy’s cash value. Some whole life policies that are issued by mutual insurance companies also offer you the chance to earn dividends. However, this part of the premium is not a guaranteed return.
One of the main advantages of whole life insurance is the ability to save and increase the cash value of your policy while deferring taxes. Depending on the policy and the market conditions, you may be able to establish a high enough cash value so you won’t have to continue paying premiums when you are older. You can also borrow from the cash value or take out what is called a policy loan which offers definite tax advantages. Another advantage is the fact that your premiums will never increase; they are guaranteed for the remainder of your lifetime as long as you pay the determined amount.
A disadvantage of whole life insurance is the fact you can’t choose to invest in different types of accounts such as stocks, bond funds or money market funds. The insurance company will decide how and where to invest your premium dollars. Because whole life insurance remains fixed throughout your life, you have no flexibility when it comes to your premium. This can be problematic if you encounter a major change in your retirement or insurance plans.
What Is It
Whole life insurance is appropriately named because it provides you with permanent life insurance for your whole life. This is quite different from term life insurance that only covers you for a specific period. The actual time period varies according to your insurance provider, but most policies remain active until you reach at least 100 or in some cases, even older.
There are three types of whole life insurance: traditional, single premium and interest-sensitive. Regardless of the type you choose, you won’t have to worry about your policy lapsing if you continue to pay your premiums every year. Whole life insurance also gives you the opportunity to build cash value and defer taxes on the money you save.
Who Is It Best For
Whole life insurance is best suited for anyone who wants the minimum risk, along with the guarantee of a minimum cash value for their investment. Many insurance companies are more apt to issue whole life insurance policy for individuals who are suffering from health problems. Term life insurance policies are much stricter. Many senior citizens also choose to purchase whole life insurance because of the more relaxed requirements. If you have acquired a high cash value, you may be able to pay your premiums from the acquired value. This can prove very helpful if you happen to lose your job or encounter financial difficulties.
Advantages
Build Cash Value
The ability to build cash value is one of the main advantages of purchasing whole life insurance. Your life insurance company will invest some of your premiums so you can increase your savings. They will then add your return on investment to the savings portion of your policy. This will further increase your cash value. Certain whole life policies also offer you the ability to earn dividends. This turns your policy into an asset, rather than merely an expense. Depending on the market conditions and your particular policy, you can sometimes establish enough cash value to cover your premiums as you grow older.
Tax Deferral
Whole life policies enable you to defer paying taxes on any money you have earned. This will further increase your cash value. You can also enjoy significant tax advantages if you decide to borrow from the cash value of your policy or take out a policy loan.
Guaranteed Premiums
Another advantage of whole life insurance is guaranteed premiums. As long as you pay the specific amount, most insurance companies will never increase your premiums. This can provide you with peace of mind and help you with your future plans. Depending on the company, you may need to purchase a rider to guarantee a set monthly premium.
Guarantee of Increased Cash Value
Most insurance companies will guarantee that the cash value of your policy will increase. This means you are protected even if the company’s performance drops or if they experience a higher number of death claims than expected. This is quite different from universal life insurance where the cash value of your policy may drop.
Disadvantages
Low Rate of Return
Although you will earn money on your investment, whole life policies typically earn a much lower rate of return than many other investments. You will need to maintain your policy for at least 20 years or more in order to yield a reasonable return.
Less Flexibility
Another disadvantage of whole life insurance is their inflexibility when compared to other types of insurance policies. You won’t be able to choose which types of accounts will be used to invest money from your premiums. Therefore, you can’t decide whether to invest in money market funds, stocks or bonds. The insurance company has complete control over exactly how much money and where to invest part of your premiums.
You also have no flexibility when it comes to your premiums. Whole life insurance will remain fixed throughout your entire life. This can cause problems if you suffer financial problems, want to change your insurance or encounter changes in your retirement plans.
Higher Premiums
In addition, you will pay more for your initial premiums than a term life policy. For example, if you are 25 years old, you could normally purchase 10 times more coverage with a term life policy than with a whole life policy for the same premium. This also means that you will lose a lot of money if you decide to cancel your insurance policy within the first few years.
Unnecessary Coverage
Another problem with whole life insurance is the fact that you may end up paying for insurance coverage you don’t need. Most people require less insurance as they get older because their situation changes; you children may be finished school or you may pay off their mortgage. Therefore, you may end paying much more for your whole life policy when that money could have been invested elsewhere and earning much higher returns.
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