Whole Life Insurance
Whole life insurance is one of the major types of life insurance policies that many people choose to insure themselves with. Much like any other life insurance policy, whole life insurance serves as coverage in the case of an insured person’s passing. Whole life insurance tends to have more coverage than other policies, and a few key differences beyond that. There are four main things to know about whole life insurance:
- This policy lasts for the insured person’s whole lifetime (given the name)
- You may hear it referred to as “permanent” or “traditional” life insurance
- Life insurance benefits are paid out when the policy holder dies—this death benefits is usually a set amount decided upon when the policy is first bought
- Whole life insurance has a savings component, in which your cash value can grow
How does whole life insurance work?
Much like most kinds of insurance policies, you pay a certain amount (a “premium”) every month, and when the event that you’re insured against—in this case, death—your policy kicks in. In the case of whole life insurance, it means that the beneficiaries chosen by the insured party will receive the death benefit, meaning the payout of cash that was decided upon at the policy’s signing. In addition to that payment, whole life policies include a savings portion, which acts like an investment that could have accumulated interest on a tax-deferred basis.
This concept of growing in value is key to whole life insurance when compared to other life insurance policies, and a large reason why many choose whole life insurance over other options for policies.
In order to ensure that your beneficiaries reap the benefits of your whole life insurance policy, you can make periodic premium payments or in some cases, pay the policy off after a period of years. To build up the cash value of your life insurance (this is in addition to the typical death benefit provided by your policy), you can even pay more than your scheduled premium, and allow interest to accumulate on that savings portion of your policy.
Interest accumulation with whole life insurance
If you choose whole life insurance, the growing value of the cash you’re investing in the policy is a huge benefit. In addition to being an extra chunk of change for your beneficiaries, the insured party will have the option to access that cash. That means that even while you’re still alive, you can request a withdrawal or a loan from your life insurance policy.
Before making that decision, be sure that you’re clear on your insurer’s policy with withdrawals, and the interest rate that will be charged. Withdrawals or loans from your policy will affect your cash value (the part of your whole life insurance policy that has the opportunity to grow like an investment) but not the fixed amount of the death benefit (the payout beneficiaries receive with most life insurance policies)
Term life insurance vs whole life insurance
The second major type of life insurance policy you can have, is called term life insurance. Unlike whole life insurance, term only covers policyholders for a decided amount of time—usually around 20-30 years—rather than for their whole life. Due to this limitation on the policy, term life insurance tends to be more affordable than whole life insurance.
Term life insurance also doesn’t have the cash value portion that whole life does. This means beneficiaries will only receive the death benefit (payout that happens when the insured party passes), the cash you pay into your policy does not accumulate interest, and you can’t withdraw or take loans out on your policy like an asset. This may be restricting for some people, but many who choose term life insurance rely on other types of investments to see cash growth, and use life insurance as more of a simple replacement for their income in the unfortunate case of their death.
For those who wish to be covered for their whole lives with life insurance, a whole life policy is likely the way to go. Term life insurance certainly has its benefits, namely being more affordable, but the limitations of this policy might not be the best for everyone. If you have no other investments, then the chance to grow your cash’s value with a whole life insurance policy is likely very appealing.
Who buys whole life insurance?
Since whole life doesn’t expire, people may buy it as a tax-advantaged way to help transfer wealth to the next generation. In other words, consumers typically buy term life insurance hoping that they won’t need it, and only using it as a replacement for their income if they pass; however, policy holders buy whole life insurance policies believing that they will use it eventually.
Some older people may buy small whole life policies to make certain that their loved ones have at least some cash to pay for their land and handle other kinds of end-of-life expenses. Since most people can enjoy tax-deferred growth and death benefits, some whole life buyers want to use it as part of their tax-management strategy.
There are many reasons that whole life insurance could be the right policy choice for you, and the beneficiaries you’re looking to pass it down to. If you are not interested in investing in the stock market, but want to have some sort of cash growth in your financial portfolio, whole life insurance is one way that you can do that.
Get quotes on whole life insurance policies
If you’ve decided that whole life insurance might be the right kind of policy for you, start shopping for different plans from trusted insurers, using our life insurance policy quoting tool. You’ll be able to get free quotes, and compare different whole life insurance policies to find out what’s best for you.