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.
Whole Life Compared to Other Life Products
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.
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 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.
- 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.
- 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.
- If you have a need for permanent insurance now because you waited a long while to purchase it, or you cashed in an old policy or let it lapse because of prior financial difficulties, whole life is going to be the best product for your final expenses.
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.
The Various Flavors 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.
Graded Benefit Whole Life
This whole life product is used primarily for guaranteed issue policies. It is the perfect solution for individuals who do not qualify for standard life insurance because of health issues. This policy contains a waiting period of two or three years when it will only pay the death benefit if the death is from accidental causes. Graded benefit whole life is typically used for final expense or burial insurance.
Single Premium 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 Whole Life Insurance is 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 enough 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.