Whole life insurance can be something of a contentious issue.
Is it really necessary? Is it the right option for you? And, if it is the right option, where do you get it?
We’ll answer those questions and explain what whole life insurance is.
It’s not as simple as you might think. Yes, it tends to be pricier, but things can’t always boil down to costs. It’s important to understand the implications of not choosing whole life coverage.
What is Whole Life Coverage?
Whole life insurance is a form of permanent coverage. You’ll be covered from when you take the policy out until the day that you die.
The policy will also usually include a cash-value portion, meaning as you pay more premiums, the value grows.
You are often allowed to borrow against the cash value or use it as collateral for a loan. When you die, the funds are paid directly to your beneficiary and won’t form part of your estate.
At that time, the policy will pay out the face value of the policy and reabsorb the cash value.
There are usually a few different options when it comes to the death benefits. These include:
- A straight death benefit
- An increasing death benefit
- A death benefit plus the return of your premiums
Your premium is set at the same rate that you took it out at, so it’s beneficial to take the policy out while you are young and healthy.
It will cost you a lot less that way around. Naturally, since this is likely to be a long-term relationship, you need to ensure that the insurer is well-established.
Whole Life Versus Term Life Insurance
Let’s have a look at some of the key differences between whole life and term life insurance to help you decide what life insurance to buy.
The Policy Term
With whole life coverage, you are insured until the day you die.
As long as your premiums are kept up to date, you’ll be covered, whether you’re fifty or eighty.
Term life ends at a certain age, or after a pre-determined number of years. At the end of the term, the face value of the policy is paid out and your coverage is terminated. If you die before then, your family gets the money.
This difference is an important distinction because if you decide that you want to be reinsured when the term expires, you’ll pay more for coverage.
Whole life costs a lot more than term life, because there is a cash value embedded in the plan, and the length of the coverage is unlimited.
You could be paying the same premium for the next twenty or thirty years. Then the insurer thus can’t increase the premiums to match market values over time.
Cost is one of the most crucial factors you should consider as you select a life insurance plan, weighing the value of the policy against the cost.
In most cases, you’ll find that term life insurance is a better fit in terms of affordability and coverage, but there are some benefits to whole life insurance.
Let’s take a look.
The Advantages of Whole Life Insurance
The main advantage of whole life insurance is that it accumulates a cash value. That means the policy will quickly become an asset.
Over time, this cash value grows as interest is added. Better still, the interest is tax-free, just as it would be in an IRA.
You are also able to withdraw the funds from the policy tax-free, providing that the amount withdrawn is less than the amount you’ve paid in premiums. Anything over and above that amount is taxable. You may also use the policy as collateral.
It sounds great, but there are terms and conditions attached to withdrawing the funds. Some companies will treat this as a surrender of the policy.
If that happens, it’s all taxable. The amount that your beneficiaries get paid out, in the end, is also affected.
That said, if you need money in a hurry for an emergency, it is an option.
Also, if you’re no longer able to work, the premiums can be paid from the cash portion. This means less of a payout but also that your coverage continues whether you’re working or not.
Naturally, the death benefit is a big draw as well. The money can be paid directly to your beneficiary. This saves on the death duties to be paid and can help ease the financial burden incurred by your passing.
If you do have any loans against the policy, the person holding the policy will be entitled to a portion of the payout to settle the loans. Anything that is left over is for your family.
You might also get into a position where the interest you’re earning is more than the premiums you pay. If this is the case, your policy will be moved into a paid-up status. You can then choose to continue paying into it or stop.
We do need to highlight that stopping your premiums or drawing on the cash value will affect the payout your family receives.
Understanding the Cash Value of Your Policy
The fact that the policy accumulates a cash value is a big plus, but it needs to be adequately understood.
The pros include:
- Your investment is protected from market fluctuations.
- The interest is tax-free, and there are no limitations on contributions.
- You might even earn dividends on the cash value.
- It’s a living benefit for you. If you need emergency access to the money, you can get a loan.
- If there are paid-up payments additions, these will be paid to your beneficiaries in addition to the face value.
How Much Whole Life Insurance Do You Need?
When it comes to getting just the right amount of insurance, it gets tricky.
You want to ensure, at the very least, that your family is left in the same financial situation or better after you die. You don’t want them to be overburdened with debt or having to sell the family home.
At the same time, the higher the face value, the more you can expect to have to pay for your coverage. So, how do you work out how much life insurance you need?
There are a few factors to take into consideration:
- The amount of debt you have. You should consider at least ensuring that you cover your existing debt.
- The cost of the funeral.
- The cost of medical bills that might accrue while you’re still alive.
- What your spouse will do for money after you’ve gone. In this respect, term life would probably be a cheaper way to provide a replacement income, but it is something to keep in mind.
- Any business expenses that you may have.
- Any legacies that you’d like to leave. Maybe you want to have enough to pay for all your debt and also a college fund for your granddaughter for example.
Splitting the Payments Between Whole Life and Term Life
An alternative to picking one whole life coverage and some term life coverage and get the best of both worlds. It’s a good idea to balance the two so that your spouse is comfortable after you’ve passed.
Let’s say that decide you’ll need $200,000 in total. Does that mean that you need to take out $200,000 in whole life coverage?
You could, but it would be expensive. What you could do instead would be to take out $50,000 as whole life coverage and the rest as term coverage.
That way you can pay less overall, and still enjoy some permanent benefits. You get to lock in your whole life insurance rate while you’re younger, and so pay less over time.
There are a lot of factors to consider as you shop for life insurance. No one insurance policy is going to be perfect for every need that you have.
By doing your research and understanding how different policies work, though, you can come much closer to finding the perfect policy for you.
Working with an independent agent is the best way to ensure you’re actually getting the best policy for your needs.
Independent agents give you access to numerous life insurance companies rather than being captive to one. You can contact us for help picking the perfect policy and get quick, free quotes from the best life insurance companies today.