Is whole life insurance right for you? This guide will help you decide.
Whole Life Insurance Overview
Get the Pros and Cons of this type of life insurance policy before you spend your money!
Term vs Whole Life
Comparisons should look at the cost of coverage and the benefits and features of each type of life insurance policy.
When choosing between term life and whole life insurance, start by deciding why you need life insurance in the first place.
Thereafter you can then break down your insurance needs into shorter vs longer-term needs.
At that point, we can look at which type and how much life insurance is best to meet your needs.
Term life insurance is temporary and provides you with low-cost death benefit protection for a specified term length.
During the term period, your premium remains level.
Whole life insurance is permanent coverage.
It provides you with lifetime protection, plus the potential to accumulate cash values.
You can borrow against cash values, surrender it, or use it to supplement retirement income.
Another type of permanent policy that should be compared to a whole life policy is universal life insurance.
That’s the reason why is that each type of life insurance policy has its own pluses and minuses.
IF you need help understanding the application process, check out our guide – Life Insurance for Dummies.
Whole Life Companies
These companies offer whole life:
- American National
- Mass Mutual
- New York Life
- Northwestern Mutual
- Penn Mutual
- Protective Life
- United of Omaha
Whole Life Insurance Policies
Different types of policies are available.
Choices include single premium, limited pay, guaranteed issue, interest-sensitive, and participating whole life policies.
Traditional death benefit settlement options such as lump sum, life income, fixed amount death benefits are available with whole life.
Life insurance riders are available with many companies, including:
Accidental Death Rider – Provides an additional death benefit should your death occur as the result of an accident.
Child Rider – Many policies allow you to add a small death benefit on your children for a low price.
You may exchange the rider for an individual policy at a later date.
Overloan Protection Rider – Protects your policy from lapsing should you access the cash values of your policy.
The reason why this is a good rider to have is that a lapsed policy may create a tax issue for you.
Surrender Value Enhancement – Increases the cash value of your policy should you decide to surrender the policy.
Your whole life insurance policy has the potential to build cash value over a number of years.
Once your policy has accumulated enough cash value, it may be accessible to you via policy loans as mentioned below.
While you may borrow against a policy, it’s complicated…as explained by Mass Mutual’s disclaimer.
Access to cash values through borrowing or partial surrenders will reduce the policy’s cash value and death benefit, increase the chance the policy will lapse, and may result in a tax liability if the policy terminates before the death of the insured.Mass Mutual
Ask for illustrations showing future withdrawals to give you a better idea of what to expect.
If you are an employee of a company that is taking out a keyman life insurance policy on you, make sure you negotiate to have the future rights of the policy at retirement, leaving the company, etc.
Whole life insurance can also be used for SBA life insurance loan requirements.
One of the features of cash value whole life insurance policies is the ability to access your cash value using policy loans.
Cash values accumulate on a tax-deferred basis, not a tax-free basis.
The appeal of the cash value savings component of your whole life is that you may accumulate cash.
Policy loans can be used on whole life insurance for senior citizens, but be careful.
As long as the cash is accessed via a loan and the policy hasn’t lapsed, there is no taxation on the cash you receive.
If you lapse the policy, you may trigger a significant taxable event for yourself.
Always consult your tax advisor as we don’t give tax advice.
Policy loans are different than say a business loan where your lender would require an assignment of life insurance in order to lend you money.
When your whole life insurance policy pays dividends, it is called a “participating” policy.
The IRS defines dividends as a return of the excess premium you paid into the policy, and therefore are not taxable.
(consult your tax advisor for full details regarding taxation).
Some policies give you a choice as far as how your dividends are used.
- Reduce the premiums you pay
- Purchase Paid-Up Additions (PUA)
- Dividends get paid to you.
- Reduce Loan Balances
- Apply to Loan Interest
At year-end, the company adjusts the policy based on actual performance vs. assumed performance.
At that time, the company declares its dividend rate for your whole life insurance policy.
Your dividends are not guaranteed.
Request multiple illustrations showing different dividend scenarios.
Guaranteed Acceptance Whole Life Insurance
If you’re looking for a life insurance policy of $25,000 or less, some companies offer guaranteed acceptance policies.
These are mainly used as life insurance for seniors.
We have guaranteed acceptance policies from AIG, Kemper, United of Omaha, and Gerber Life.
The death benefit is graded during the first few years of the policy.
Most of these types of policies require little if any medical underwriting.
Whole life insurance lasts for your lifetime and may provide you with cash value accumulation and dividends.
Term life insurance is temporary, providing you with protection for a specified term length.
Whole life insurance lasts for your lifetime and may provide cash value for you to access during your lifetime.
With whole life insurance, your premiums purchase death benefit protection.
Whole life also offers the potential to accumulate cash values that may be accessed later on via surrenders or policy loans.
Ask lots of questions. If you don’t understand how the policy works after your agent explain it, you shouldn’t buy it.
Please take a few minutes to submit your quote request today. Thank you.
Michael Horbal is the founder and owner of RiskQuoter.com and a licensed life insurance agent who has helped thousands with affordable protection for families and businesses.