Whole Life Insurance
If you’re the kind of person who likes predictability over time, Whole Life insurance might be right for you. It provides you with the certainty of a guaranteed amount of death benefit and a guaranteed rate of return on your cash values.
Why would someone need coverage for an extended period of time?
Because contrary to what a lot of people think, the need for life insurance often persists long after the kids have graduated college or the mortgage has been paid off. If you died the day after your youngest child graduated from college, your spouse would still be faced with daily living expenses. And what if your spouse outlives you by 10, 20 or even 30 years, which is certainly possible today. Would your financial plan, without life insurance, enable your spouse to maintain the lifestyle you worked so hard to achieve? And would you be able to pass on something to your children or grandchildren?
Why choose Whole Life
If you’re the kind of person who likes predictability over time, Whole Life insurance might be right for you. It provides you with the certainty of a guaranteed amount of death benefit and a guaranteed rate of return on your cash values. And you’ll have a level premium that is guaranteed to never increase for life. Another valuable benefit of a participating Whole Life policy is the opportunity to earn dividends. While your policy’s guarantees provide you with a minimum death benefit and cash value, dividends give you the opportunity to receive an enhanced death benefit and cash value growth. Dividends are a way for the company to share part of its favorable results with policyholders. When you purchase a participating policy, it is expected that you will receive dividends after the second policy year – but they are not guaranteed. Dividends, if left in the policy, can provide an offset (and more) to the eroding effects of inflation on your coverage amount.
What are the advantages of whole life insurance?
- A fixed and known annual payment.
- Guaranteed maximum insurance costs and guaranteed floor on interest credited to cash values.
- Cash value interest or earnings accumulate tax-free or tax deferred, depending on whether gains are distributed at death or during lifetime.
- Whole life, through the combination of guaranteed cash values and available dividend formulas, frequently pays higher effective interest on cash values than is available from tax-free municipal bonds.
- Cash values are not subject to the market risk associated with longer term municipal bonds and other longer term fixed income investments.
- Policy owners can borrow cash values at a low net cost. Although policy owners must pay interest on policy loans, cash values continue to grow and as the insurance company credits at least the minimum guaranteed rate in the policy. Consequently, the actual net borrowing rate is less than the stated policy loan rate.
- Life insurance proceeds are not part of the probate estate, unless the estate is named as the beneficiary of the policy. Therefore, the beneficiary can receive the proceeds without the expense, delay, or uncertainty caused by administration of the estate.
- Policy owners can use life insurance policies as collateral or security for personal loans.
What are the disadvantages of whole life insurance?
- The premium may be too expensive.
- In the early years, the amount of protection is lower relative to the premium spent compared with term insurance. However, later, as term premiums rise compared to the level premiums for whole life which can provide an increasing death benefit and cash value, the reverse typically will be true.
- Surrender of the policy within the first five to 10 years may result in a loss of cash value due to surrender charges.
- Lifetime distributions of cash values that are gains over your investment (premiums paid in) are taxed as ordinary income.
Cash Value – understanding this Key Feature
Another key characteristic of permanent insurance is a feature known as cash value or cash-surrender value. In fact, permanent insurance is often referred to as cash-value insurance because these types of policies can build cash value over time, as well as provide a death benefit to your beneficiaries.
Cash values, which accumulate on a tax-deferred basis just like assets in most retirement and tuition savings plans, can be used in the future for any purpose you wish. If you like, you can borrow cash value for a down payment on a home, to help pay for your children’s education or to provide income for your retirement. When you borrow money from a permanent insurance policy, you’re using the policy’s cash value as collateral and the borrowing rates tend to be relatively low. And unlike loans from most financial institutions, the loan is not dependent on credit checks or other restrictions. You ultimately must repay any loan with interest or your beneficiaries will receive a reduced death benefit and cash-surrender value.
If you need or want to stop paying premiums, you can use the cash value to continue your current insurance protection for a specified time or to provide a lesser amount of death benefit protection covering you for your lifetime. If you decide to stop paying premiums and surrender your policy, the guaranteed policy values are yours. Just know that if you surrender your policy in the early years, there may be little or no cash value.