Farshad Asl – a leadership expert and Amazon best-selling author – once regarded “Life Insurance” as “Love Insurance” that helps purchasers leave a legacy for their beloved ones. Even though you may well perceive life insurance’s value like him, have you selected the most suitable type of insurance? Whole life insurance may be an appealing option for some but is it worth your choice? Read this comprehensive guide to figure it out!
What Is Whole Life Insurance?
Whole life insurance is the most popular permanent life insurance policy that gives you lifelong coverage, including a death benefit and the cash value. When first applying for coverage, you can select the coverage amount. Your premium will be calculated based on your age, gender, and health status. Then, you need to pay your predetermined premiums to keep your whole life insurance in effect.
Once you have purchased the insurance, your premiums payment stays the same during your insurance policy life on the condition that you pay them. You can choose to pay your premium monthly, quarterly, semi-annually, annually, or even after a certain number of years.
How Does the Cash Value Work?
As previously mentioned, whole life insurance offers the policyholder the cash value, which is a portion of the premiums paid into a tax-deferred account. You can use the cash value in diverse ways.
You can take out tax-free money. However, when surrendering or terminating your policy, your withdrawn money will become taxable income.
Besides, you can borrow a loan with low interest rates, which you still have to pay off. Failure to pay can result in your spouse, child, or any individual eligible for your policy coverage losing a part or all death benefit when you pass away. For any amount you owe the insurance company, they will deduct it from the benefits.
Besides, you can get the accumulated cash value by giving up your policy. The amount of money you can get back depends on how long you have had the policy when terminating it. Remember that cancelling your policy within the surrender period may lead to your penalty. Moreover, since the cash value usually grows after 2 or 3 decades, you may receive less cash than what you’ve paid if you surrender your policy early.
What Are Whole Life Insurance Costs?
Most people compare the rates of traditional term life insurance with those of whole life insurance and see that it’s never an apples-to-apples comparison. The whole life insurance premium payments you need to pay are much higher than those of term life insurance.
When you want to buy a whole life insurance policy, insurance companies often give you an insurance quote. This quote includes cornerstones of your policy, such as coverage amounts, liability, and endorsements. Based on the quotes, you can compare prices and services from different insurers to select the most appropriate policy for you.
Typically, you must pay your premiums until you reach 65, 99, or 121. Some insurers offer non-traditional premium payment choices. For instance, you can choose to pay the policy’s lifetime premiums in 10 years, 20 years, or upfront. You need to spend more money for a policy requiring you to pay until you reach 65 or within 1 or 2 decades.
Is It Worth Investing in Whole Life Insurance?
Even though the average person does not prefer a whole life insurance policy, others still accept to pay the higher premiums. According to Patrick Hanzel, a Senior Planning Specialist, this insurance policy is typically an excellent choice for those having dependents with special needs, stable annual incomes, etc.
You can use whole life insurance to fund a trust that supports your dependents after your death. You may find it worth your investment because it safeguards your beloved ones from financial burdens when you’re gone. The money your beneficiary gets at your death within the coverage period is tax-free. This death benefit allows them to deal with your burial, funeral, or other final expenses without dipping into their savings and investments. Buying a whole life insurance policy for business owners is also common in Canada.
When you are young, and in good health, you may see that whole life insurance premiums are expensive. However, when you turn old age, it turns out that they are relatively affordable compared to your death benefit. This is a significant advantage because your premiums will stay the same regardless of your increasing age and declining health.
Cash Value Access
Moreover, if you have a tight budget and need a fixed premium, you can turn to whole life insurance. The cash value, for any reason, is within your reach, especially in case of an emergency. You may also get dividends, though not guaranteed. Some companies allow you to add any dividends you receive to your policy’s cash value or pay for your insurance premiums.
How To Select the Appropriate Whole Life Insurance?
Select The Right Coverage Amount
If you want to pick the policy with your desired coverage amount, you should determine what you need in this policy. A comparatively small policy — $10,000, for instance — is suitable to cover a funeral. However, you may have to select a larger policy for priorities, such as funding a trust for your dependents with special needs.
Look Into Whole Life Insurance Riders
You can add extra coverage features, also called riders, to your life insurance policy. For example, you can supplement a chronic illness rider, which allows you to receive some of the death benefits as you suffer from a severe illness. You can opt for the “disability waiver of premium” rider to skip payments when you become disabled.
Many insurers don’t require you to pay an extra premium for an accelerated death benefit rider. They provide this rider for policyholders to tap part of their death benefits when they become terminally ill.
In general, insurance companies offer diverse kinds of riders with varying costs. Hence, you should ensure that you think it over to get a policy with your needed riders.
Consider The Cash Value Return Rate
As mentioned before, a whole life insurance policy can bring about a specific growth rate of cash value. Some could work better if they get dividends. While not guaranteed, dividends are worth your consideration when you compare policies. Most insurance companies give you illustrations of how each cash value policy works. Keep in mind that you need to inquire which parts are guaranteed.
Know Whole Life Insurance Approval Processes
There are three main approval processes: fully underwritten, simplified-issue, and guaranteed-issue insurance. Typically, you can get the best price by purchasing a fully underwritten policy, which requires your medical checkup. In contrast, simplified-issue and guaranteed-issue policies offer relatively small death benefits since they do not consider your health conditions. Some policies may even not give you the full death benefit when you’re gone in the first few years of your policy.
Understand What You’re Purchasing
When you purchase an insurance policy, you need to understand each policy’s available options and provisions thoroughly. You should put in your time and effort to shop around, compare different life insurance companies, and opt for the most suitable whole life insurance policy. Despite higher premiums, this kind of insurance can be an asset for those who don’t want their money left behind for their dependents. So, despite paying more for whole life insurance, your peace of mind is worth the cost. Also, take a look at Universal Life Insurance page too learn about its pros and cons, and how it works compare to Whole Life Insurance.
Frequently Asked Questions
What should I consider before buying whole life insurance?
You can consider the factors such as whether you own a business or large estate, you want to leave a guaranteed inheritance, provide long-term care for your beloved ones, or cover funeral expenses. If you are in one of these cases, whole life insurance is worth your purchase though its premiums are much higher than those of term life insurance.
What factors determine the cost of whole life insurance?
In addition to your coverage and other factors such as your gender and physical conditions, other things can impact whole life insurance costs. For example, if you decide to pay for the whole policy in a brief time in a decade or two decades, the premium can increase drastically regarding the front-loading of payments. Also, if your policy has a higher guaranteed return, the insurer may charge you higher annual premiums.
What are the key benefits of whole life insurance?
Despite its higher premium rates than term-life insurance, whole life insurance can be a worthwhile investment for many considering certain aspects. Specifically, your premiums are fixed and never increase irrespective of market conditions. You can be able to withdraw funds or cash out an amount of money from the policy. In addition, your death benefit will be guaranteed provided that you pay the premiums.
Can I cash out money from my whole life policy?
Yes. You are allowed to surrender the policy and pull out money from your whole life insurance policy with the accumulated cash value tax-free. You should contact your insurance company to know how much is available if the interest rate is applied and whether the loan is taxed. Although it is a sensible decision to withdraw money in certain circumstances, it’s worth remembering that the death benefit your beneficiaries obtain when you die will decrease.
What happens when whole life insurance matures?
The whole life policy often expires when the insured reaches the age of 100. When the insured outlives the policy, some insurers pay the insured the cash value equivalent to the coverage amount and end the policy. Meanwhile, some others may extend the policy, and hence, the policyholder will continue to pay premiums until they pass away.
What are alternatives to whole life insurance?
There are some alternatives to whole life insurance, including term life insurance, single premium life insurance, and other types of permanent life insurance such as universal life. Since term life insurance is more affordable than whole life, you can purchase much more coverage with the same amount of money. Single premium insurance is a type of whole life policy only requiring one upfront payment instead of a periodical payment for lifetime coverage. And other types of permanent policies have different premium rates and features that can cater to your various needs.