Whole life insurance is a type of whole life insurance that provides lifelong protection. It offers a variety of guarantees that will appeal to those who don’t want to do any guesswork after purchasing life insurance.
Whole life insurance combines an investment account called “cash value” and an insurance product. Your beneficiaries can claim the policy’s death benefit when you die, as long as you pay your premiums.
What Is Whole Life Insurance?
Whole life insurance provides coverage for the rest of your life and includes a cash value component so you can use it while you are alive.
Whole life insurance offers three kinds of guarantees:
- Guaranteed minimum rate of return on cash value
- Promise that your premiums will not increase
- A guaranteed death benefit amount
Whole life insurance is more expensive than term life insurance because the person with whole life insurance is guaranteed a death benefit upon death. Term life insurance, on the other hand, offers a fixed rate for a specific period of time, such as 20 or 30 years. Term Life Insurance Ratio Whole life insurance because they only provide coverage and not cash value.
How Does Whole Life Insurance Work?
Whole life insurance starts with choosing the amount of coverage that best suits your needs. Once you have a policy, whole life insurance stays in effect for the rest of your life — as long as you continue to pay your premiums. The cash value portion also increases over time.
Cash Value Accumulation of Whole Life Insurance
Part of the premium payment for whole life insurance is accumulated in a cash value account that grows over time and can be accessed by taking a policy loan or surrendering the policy.
Similar to a 401(k) or IRA, money in a cash value account grows tax-free. However, if you take out the cash value, including investment income, that portion will be taxed.
The accumulation of cash value is the main difference between whole life insurance and term life insurance. While actual growth varies from policy to policy, some policies take decades to accumulate cash values that exceed the amount of premiums paid. This is because the entire premium does not turn into cash Value – just a fraction. The rest goes to pay for the insurance itself and costs.
Most whole life policies have a low percentage guaranteed rate of return, but there is no way of knowing how much your cash value will actually grow. That’s because most insurance companies that sell whole life insurance also offer rates based on “non-guaranteed” rates of return dividends. You can choose to use the dividends for cash value each year, but you don’t know how much that will reach over time.
It can take decades for a policyholder’s cash value to exceed premiums paid.
Using Cash Value in Whole Life Insurance
You can get the cash value by withdrawing money or taking out a loan or surrendering your policy. If your loan is tax-free, you can repay it with interest. No tax as long as your withdrawals are less than the portion of your cash value attributable to premiums You have already paid. If your withdrawals are larger, you will be taxed on the difference since these are investment gains.
Both outstanding loans and withdrawals reduce the amount of the death benefit paid if you die. That’s not necessarily a bad thing. After all, one of the reasons to buy whole life insurance is to gain cash value, so why put your money there and not use it?
Before making any decisions, you want to make sure you understand all the ramifications of getting cash value.
Death benefit and picking beneficiaries
When you purchase the policy, you will choose the life insurance beneficiary to receive the death benefit. You don’t have to split the payout equally among beneficiaries. You can assign percentages to each, such as 75% to Mary and 25% to John.
It is also a good idea to designate one or more interim beneficiaries. These people are like your backup plan in case all the primary beneficiaries die when you die.
Designating beneficiaries is an important task, and it is also important to keep your designations in sync with your wishes. Regardless of your wishes, life insurance companies are contractually obligated to pay the beneficiaries named on the policy. It is wise to check annually to verify your Beneficiaries still reflect your wishes.
What happens when you die
A major selling point of whole life insurance is that it stays in effect until your death as long as you pay the required premiums.
But here’s the catch: For most policies, no matter how much cash value you’ve accumulated, the policy will only pay a death benefit. At your death, the cash value reverts to the insurance company. Remember that outstanding loans and past cash value withdrawals are reduced Pay your beneficiaries.
Some policies allow you to purchase riders that provide death benefits and accumulated cash values to your beneficiaries. The rule also means you’ll pay higher annual premiums because insurers pay higher fees.
How Much Does Whole Life Insurance Cost?
While some of the cash value features and perpetual nature of whole life insurance sound attractive, for many people it is simply not affordable.
Many life insurance buyers compare term life insurance with overall insurance costs. This is by no means an apples to apples comparison because the policies are so different. That said here is an example of a whole life insurance quote based on a 30 year old male with an average height and weight of $500,000 report.
This cost differential makes whole life insurance less attractive to many people with insurance needs.
Here is a life insurance calculator to help you determine your life insurance needs.
Factors Affecting Whole Life Insurance Premiums
The amount of coverage you choose will help determine your rates as well as:
- Age and gender
- Height and weight
- Past and current health conditions
- the health history of your parents and siblings
- Nicotine and marijuana use, including nicotine patches and gum
- Substance abuse
- Criminal history
- Driving records (especially DUI convictions and movement violations such as speeding tickets)
- Dangerous hobbies and activities (such as flying an airplane or rock climbing)
With whole life insurance, there are many other features and terms that also affect the cost, such as:
- Payment period: You can choose to pay for the entire policy over a shorter period of time, such as 10 or 20 years. Premiums will rise substantially to account for early payments.
- Guaranteed return rate: Some companies offer higher guaranteed returns, which can lead to higher annual premiums.
- Dividend crediting: Many whole life policies pay dividends, and the policyholder can choose how to receive them. A lender that counts your dividend payments as a premium reduces your annual out-of-pocket costs.
Waiver of whole life insurance options
With term life insurance, you can simply stop paying if you no longer need the coverage. Once you stop the policy from lapsing, the insurance company will no longer pay any benefits if you die.
Whole life insurance is not that simple. If you stop paying, the cash value will be used to pay any premiums until the cash value is exhausted and the policy lapses. But there are options other than simply stopping payments.
Options vary depending on your plan, but can include the following strategies.
Take the cash surrender value
You can simply request that the cash surrender value be paid to you. This is the cash value less any surrender charges. This action terminates the policy, so it should only be done if you no longer need the policy or have new policy.
By taking the surrender value, you must pay income tax on any investment gains that are part of the cash value.
Ask about reduced paid-up life insurance
If you want a paid-up policy with a smaller death benefit, the life insurance company will calculate how much death benefit will be paid based on the amount you have already paid and offer you a policy with a lower death benefit. This avoids any taxes and gives you some life The insurance is still there.
Extended term life insurance
The life insurance company takes what you’ve already paid and converts the policy into a term life policy with the same death benefit. How long the policy lasts depends on how much you’ve paid, your age, and the company’s current rates for a policy of that size and duration. This is helpful for people who want to keep some life insurance for a short period of time but no longer need whole life insurance.
You can swap out your policy for a different life insurance or annuity. This can avoid taxes on the surrender value, or if you realize that another whole life policy has better features and you would prefer to have that policy.
When Does Whole Life Make Sense?
Given the cost of whole life insurance, and the fact that many people don’t need coverage in their lifetime, it’s often not the ideal product to buy. However, there are certain situations in which it makes sense to purchase some form of permanent life insurance. You may find a generic If whole life coverage is your main goal, then life insurance policies are more affordable.
Funding a trust: Permanent life insurance can be used to fund a trust fund to support your children after your death.
Paying estate taxes: For those with estates larger than the current estate tax exemption ($12.06 million in 2022), permanent life insurance can help heirs pay estate taxes after your death. Some states have lower estate tax limits, so it may make sense for people living in those states Excellent.
To finance the sale and purchase agreement:If you are the owner of a business and have partners, you might consider buying whole life insurance to finance the purchase of each other’s business shares in the event of your death.
Top Sellers of Whole Life Insurance
Here are the top sellers in Whole Life Insurance in alphabetical order. The list is based on annualized premiums for 2020, according to financial services industry research group LIMRA.
- CUNA Mutual
- Gerber Life Insurance Co.
- Guardian Life Insurance Co. of America
- MassMutual Life Insurance Co.
- Mutual of Omaha Cos.
- New York Life
- Northwestern Mutual
- OneAmerica Financial
- Penn Mutual
- State Farm Life
Whole Life vs Term Life vs Universal Insurance
The main differences between whole life and universal life insurance are the duration of coverage, the ability to build cash value, and the flexibility of premiums and death benefits.
What is the difference between term life whole life and universal life insurance?
Term life insurance Ideal for those looking for a financial safety net over a specific working lifespan, such as the number of years it takes to pay off a mortgage. You lock in the level premium for the length of the term, such as 10, 15, 20 or 30 years. A few companies even offer 35- and 40-year term life insurance. No cash value.
Whole life insurance is for people who want a flat premium and a portion of the cash value throughout their life. Your beneficiaries will receive life insurance payouts no matter when you die, as long as you pay the premiums necessary to keep your policy in force. some shoppers may Still wondering if they should buy universal life insurance or whole life insurance.
Universal life insurance Is another type of permanent life insurance. It can be a good option if you want to be able to take advantage of the cash value of your policy and have the flexibility to adjust premium payments and death benefits as your needs change.
Is Whole Life Insurance Worth It?
The following questions and options can help you decide if whole life insurance is right for you.
- Do you need life insurance beyond 30 years?
- Do you need cash value?
- Do you want flexible payment methods or payment amounts?
- Do you pay out when you die or only after you and your spouse die?
Whole life insurance is a product with a certain use, but it’s not for everyone. The additional benefits offered by whole life insurance can often be earned by combining your retirement and investment accounts with a term life insurance policy.
Before purchasing any insurance, it is important to fully understand the options available and the various terms of the policy.
Whole Life Insurance Alternatives
Whole life insurance is just one type of permanent life insurance, so don’t just consider whole life insurance when determining whether life insurance is worth it. Other types of permanent life insurance are very different from traditional whole life insurance. Other options include:
- Universal life insurance
- Variable life insurance
- Survivorship life insurance
- Burial insurance
Life Insurance Market Share
Whole life accounts for one-third of the individual life insurance market, according to premiums paid by LIMRA, an industry-funded research organization.
Compare Life Insurance Companies
How can I find cheap whole life insurance?
Start by determining how much life insurance you need. For example, Forbes Advisor’s free life insurance calculator can help.
After you determine your life insurance amount, you need to compare life insurance quotes from multiple companies. Life insurance quotes vary from company to company. Work with a financial advisor or an experienced independent agent to identify the firm that is likely to provide you with the best offer.
What types of riders are available on whole life policies?
Whole life insurance has riders that you can add to your policy, such as premium accidental death and long-term care premium waiver refunds. Some life insurance riders can help you benefit from a whole life policy while you are alive, such as a critical illness rider that lets you If you are diagnosed with a critical illness, you can withdraw money from your own death benefit.
Adding riders allows you to customize your policy, but it can also increase costs.
Can whole life insurance policies expire?
Yes, if a whole life policy expires, the policyholder will receive the policy face value or a death benefit and the policy will terminate.
A life insurance policy may expire if the person reaches a certain age, such as 100. The portion of the policy that is due to be paid is taxable, which is why insurance companies recommend rolling over the policy beyond the due date if the policyholder reaches the specified age.
What is modified whole life insurance?
Most whole life insurance policies have a fixed premium, which means that the premium stays the same for the life of the policy. The premium amount for the modified whole life policy will be doubled. Your premiums are reduced for a certain number of years – usually the first three years Five – and then higher for the rest of your life. Death benefits will not change.
How much life insurance do I need?
To figure out how much life insurance you need, calculate your current and future financial obligations (such as a mortgage) and subtract any liquid assets that can support your family.
Our life insurance calculator can make this task easier. Enter your annual income, the number of years you would like to have alternative income to pay off debt, any future college costs, savings for funeral needs and the life insurance policy you currently hold. Calculator would recommend a life Insurance amount.
Is a whole policy a good investment?
Whole life insurance provides the guarantee of steady, tax-free cash value growth without market risk or volatility. While technically not an investment, a lifetime investment can be a low-risk option that can help you achieve your financial goals when your policy matures.
But if you’re just looking for a life insurance policy that provides a death benefit and nothing else, whole life isn’t the best option. A term life insurance policy will be more affordable and will suit your needs.
Do I need life insurance if I am single and have no dependents?
If you’re single with no dependents — and no one is counting on your income — you probably don’t need life insurance.
Remember that life insurance rates rise with age and decline in health. A Forbes Advisor analysis of permanent life insurance rates determined that the average rate for a 30-year-old woman buying whole life insurance with a $250,000 coverage is $184.95 per month. 50 years old The average rate increased to $403.09 per month.
So, if you might want life insurance in the future, it’s cheaper to buy it now.