Whole life insurance is a permanent form of insurance protection that combines a death benefit with cash value accumulations. The face amount is constant, and this amount would be paid if the insured dies at any time while the policy is in effect. Premium payments are fixed and remain the same from the original effective date to the maturity date. The policy is designed to mature at age 100-the age when premium payments would end and the cash value would equal the face amount. At maturity, the face amount would be paid to an insured who is still living.
Although whole life policies are among the most common forms of life insurance sold, most individuals do not plan on paying premiums until age 100. Many of us do not expect to live until that age. More commonly, whole life insurance is used as a form of level protection during the income producing years. At retirement, many people then begin to use the accumulated cash value to supplement retirement income.
This type of life insurance plays an important role in financial planning for many families. In addition to the death benefit or eventual return of cash value, the policy has some other significant features. During a financial emergency, policy loans may be taken and the full policy values may later be restored. If the contract is a participating policy, it may also pay dividends.
Are there choices within whole life insurance?
Yes, the most common choices include traditional, interest-sensitive, and single-premium whole life. Traditional gives you a guaranteed minimum rate of return on your cash value portion. Interest-sensitive gives a variable rate on your cash value portion, similar to an adjustable rate mortgage. With interest-sensitive whole life you can have more flexibility with your policy such as increasing your death benefit without raising your premiums depending on the economy and the rate of return on your cash value portion. Single-premium is for someone who has a large sum of money and would like to purchase a policy up front. Like other whole life options, single-premium whole life accrues cash value and has the same tax shelter on returns.
What are the benefits of choosing whole life over other types of life insurance?
Unlike term life insurance, a portion of your premium money goes toward your cash value which in turn could pay off your entire policy only after a few years. Also, your premium will remain constant during the time you are covered unless you choose otherwise. And, unless you make a change to your policy, you have lifelong coverage with no future medical exams. Whole life is also a good choice because of the tax savings.
Should I purchase a whole life policy for an investment?
The rate of return on a whole life insurance policy is very low compared to other investments, even with the tax savings factored in. Most investment professionals would agree that life insurance should not be used solely as an investment tool and you should judge your policy choices on the protection and not the rate of return. But, if you are in need of life insurance, the tax benefits and cash value is an added bonus when purchasing protection for your loved ones.
