Of all the different types of life insurance products available, Whole Life insurance is considered to be a foundational product.
Also known to many as “ordinary life” or “straight life”, whole life has been surpassed by newer products that will provide the same guaranteed earnings but with higher returns and much lower rates.
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Whole Life Compared to Other Life Insurance
Whole life insurance is a type of permanent life insurance that offers coverage for the entire duration of the policyholder’s life. Unlike term life insurance, which provides coverage for a specific period, whole life insurance provides lifelong protection. One of the key advantages of whole life insurance is that it accumulates cash value over time, which can be borrowed against or withdrawn by the policyholder.
This feature sets it apart from other life insurance options, such as term life insurance, which do not offer any cash value component. Additionally, whole life insurance guarantees a death benefit payout to the policy’s beneficiaries upon the insured’s passing, ensuring financial security and peace of mind.
In comparison to other life insurance options, whole life insurance typically has higher premiums due to its lifelong coverage and cash value component. However, this higher cost is balanced by the long-term benefits it provides. While term life insurance may be more affordable initially, it only offers temporary coverage, and the premiums may increase with each renewal.
Term Life Insurance
Although Term Insurance is considered to be one of the most popular types of life insurance, it contains many differences compared to Whole Life. Term insurance is considered temporary coverage because the policy term is limited to a block of time, typically 5, 10, 20, and 30 years.
Since the insured is paying only for the cost of insurance, term insurance policies do not build cash value over time.
Term insurance rates are much lower than whole life rates, because the mortality rate for insured policyholders is much lower than whole life, and term policies typically stay in force for only about seven years.
Once the policy expires, coverage stops unless a renewal is offered based on the insured’s new age, and then accepted by the insured.
Universal Life Insurance
Although considered a permanent type of insurance, Universal Life offers more flexibility. With universal life, the policyholder has the ability to change the amount of the periodic premium, change the face amount of the policy, and earn more than the established minimum interest if the company’s portfolio earns more than the minimum.
The universal life policyholder can access the cash value in the policy through loans or partial surrenders. The cash account, however, must remain at a level sufficient to support the cost of insurance or the policy can lapse due to lack of funds. Although typically more expensive than term insurance, universal life rates are lower than whole life.
Variable Life Insurance
Variable life insurance is also considered permanent if properly funded. These types of policies contain an investment component. The policy contains a cash value account that is invested in a number of sub-accounts. The sub-accounts are typically similar to mutual funds that earn interest.
Pros and Cons of Whole Life Insurance
As with any insurance or investment product, there are advantages and disadvantages for the consumer, but these depend on your economic situation and your ultimate purpose for considering the product.
- If you are the type of individual that finds it impossible to be a regular saver, whole life insurance will work quite well since you are forced to invest periodically.Remember, a portion of your periodic premium is considered an investment.
- Whole life insurance is particularly attractive for individuals who like guarantees. There is a segment of taxpayers who prefer to get huge refunds every year rather than keeping their money during the year. This type of individual is perfectly suited for the guarantees offered through whole life insurance. Even though the return on investment is significantly lower than other insurance products, you are guaranteed a return no matter what happens in the marketplace (as long as you make your payments).
- If you have had whole life insurance for a long time, keep it. Your premiums are low enough for your insurance coverage to be a bargain. Since current insurance rates are considerably lower now, you may as well continue with what you have.
- Whole Life insurance is expensive. It’s rarely used to cover large amounts of debt, and debt is usually reduced over time, but your whole life insurance remains the same.
- The fees associated with whole life insurance could be considered high (depending on the company you select). Although the policyholder doesn’t pay commissions and administrative fees directly, you do pay them indirectly through a reduced rate of return.
- Although your insurance agent will present you with an illustration showing “projected” earnings, it is more likely that your policy will deliver only the guaranteed minimum. Since the mortality rate is very high for whole life policyholders, the insurance carrier has very little motivation to pay more than the guaranteed minimum.
So the bottom line here is that you have fewer reasons to avoid whole life than to purchase it. Again, your consideration should be based on your current financial position and your needs for the product.
Different Types of Whole Life Insurance
It’s doubtful that anyone could accuse the insurance industry of not being creative. Over time, the three basic life products, whole life, term, and universal life, have been modified to meet the needs and interests of the marketplace.
Joint and Survivor Life
Joint and Survivor life is a modified whole life policy that is typically used to insure couples. With this type of policy, the death benefits are not paid until both of the policyholders have died.
Since these policies are typically in force for a longer period before a claim is paid, the premiums are lower than if both parties had separate policies.
The policyholder has the option to elect the death benefit to be paid on a first-to-die or second-to-die basis. Joint and Survivor Life is often used as a tool to deal with estate taxes.
Modified Whole Life
This policy is modified by having an initial lower premium in the first five years and then increases to a level slightly above the normal premium thereafter.
Graded Premium Whole Life
This type of whole life policy starts with a low initial premium that increases gradually on an annual basis until it levels out.
Single Premium Whole Life
This whole life policy is paid for by a single premium of the policyholder for a future death benefit. Because all the premium is paid in advance, the insurer will also charge a lower rate for the insurance.
Agents have to be familiar with the consequences if the premium paid results in the policy being classified as a modified endowment contract which could subject it to tax liabilities and early withdrawal penalties.
When Is Whole Life Insurance Right For You?
Although Whole Life insurance is the most expensive product when it comes to your cost of insurance there are many legitimate reasons to consider purchasing it.
- If you are a young adult in very good health and want a permanent policy that will provide a death benefit to your surviving loved ones.
- You are an ultra-conservative investor and want life insurance with a guaranteed monthly premium and a guaranteed rate of return.
- You are a senior with health insurance and need additional insurance to cover final expenses.
- The insurer pays annual dividends that are not taxable and can be used to purchase paid-up additions that will also earn dividends.
- You want access to the cash value at any age and for any reason without penalty or taxes.
When you are considering a life insurance purchase, always seek advice from a reputable and experienced broker who promises to put your needs ahead of everything else, and will answer every question and help you navigate the confusing landscape of life insurance.
Frequently Asked Questions
What are the disadvantages of whole life insurance?
For individuals looking for low-cost life insurance, whole life will likely not be a good choice. Additionally, it can take years to build cash value unless the policyholder pays significantly more than the minimum premium.
What's the difference between whole life and universal life?
Whole life insurance and universal life insurance are both types of permanent life insurance, but they differ in how they accumulate cash value and offer flexibility in premium payments. Whole life insurance provides a guaranteed death benefit and accumulates cash value at a fixed interest rate, offering stable premiums throughout the policyholder’s life. In contrast, universal life insurance offers more flexibility in premium payments and allows policyholders to adjust the death benefit and invest the cash value in different accounts, such as stocks or bonds, potentially earning higher returns. Universal life insurance offers more customization options but carries more risk, as the cash value is subject to market fluctuations. Additionally, universal life insurance policies may require regular monitoring and potential adjustments to ensure the policy remains adequately funded to maintain the desired coverage.
How does whole life insurance differ from term life insurance?
Unlike term life insurance, which provides coverage for a specific period (e.g., 10, 20, or 30 years), whole life insurance provides lifelong coverage. Whole life insurance also accumulates cash value, which term life insurance does not. While term life insurance may be more affordable initially, whole life insurance offers stable premiums and the added benefit of cash value accumulation.
Can I access the cash value in my whole life insurance policy?
Yes, one of the advantages of whole life insurance is that it allows policyholders to access the cash value that accumulates over time. You can borrow against the cash value through a policy loan or even withdraw a portion of it. However, it’s important to note that any outstanding loans or withdrawals can reduce the death benefit paid to beneficiaries if not repaid.
How much does whole life insurance cost?
The cost of whole life insurance is typically higher compared to term life insurance due to its lifelong coverage and cash value component. Premiums for whole life insurance are based on factors such as the insured person’s age, health, and the desired death benefit amount. It’s important to consider your budget and long-term financial goals when deciding on a whole life insurance policy, as the premiums remain consistent throughout the policyholder’s life.
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