Should you buy whole life insurance? Get the Pros and Cons of this type of life insurance policy before you spend your money!
Whole Life Quick Overview
Whole Life Insurance FAQ
Whole life insurance is coverage that lasts for your lifetime and may provide you with cash value accumulation and dividends depending on the design of your policy.
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 while also offering the potential to accumulate cash values that may be accessed later on via surrenders or policy loans.
Term vs Whole Life Insurance
Comparisons of term vs whole life insurance should look at the cost of coverage and the benefits and features of each type of life insurance policy.
When deciding between term life and whole life insurance, it’s easier to start by deciding why you need life insurance in the first place.
Once you know the reason why you need life insurance, you can breakdown 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 as it’s called, your premium remains level.
Whole life insurance, on the other hand, is called permanent insurance because it is designed to provide you with lifetime protection, plus the potential to accumulate cash values. The cash values may be borrowed, surrendered or used 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, and whole life vs term is no different.
Whole Life Insurance Companies
The following insurance companies offer whole life:
- American National
- Mass Mutual
- New York Life
- Northwestern Mutual
- Penn Mutual
- Protective Life
- United of Omaha
Different types of whole life insurance policies are available including single premium, limited pay, guaranteed issue, interest-sensitive and participating whole life insurance policies.
Whole Life Riders
Whole life riders are available with many companies, including riders such as:
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. In some instances, the rider may be exchanged to an individual policy for your child at a later date.
Overloan Protection Rider – Protects your policy from lapsing should you access the cash values of your policy. It’s a good rider to have when available.
Surrender Value Enhancement – Increases the cash value of your policy should you decide to surrender the policy.
Whole Life Insurance Cash Values
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.https://www.massmutual.com/insurance/life-insurance/whole-life
When you consider buying a whole life policy, ask for illustrations showing future withdrawals to give you a better idea of what to expect.
Whole Life Insurance Policy Loans
One of the unique features of cash value life insurance policies is the ability to access your cash value using policy loans.
Cash values accumulate on a tax-deferred basis, not tax-free basis. Always consult your tax advisor as we don’t give tax advice.
The appeal of the cash value savings component of whole life is that you may accumulate cash, and access it later on in life using policy loans as described later on.
While each company has its own loan provisions, many allow loans to be taken from the cash value, with the interest paid back from the policy itself.
Whole Life Insurance Dividends
If 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 dividends are not taxable. (consult your tax advisor for full details regarding taxation).
If your whole life insurance policy pays dividends, some policies give you a choice as far as how you would like your dividends 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 and declares its dividend rate for your policy.
Remember that dividends are not guaranteed, and you want to request multiple illustrations showing different dividend scenarios before you spend your money.
Guaranteed Acceptance Whole Life Insurance
If you’re looking for a life insurance policy of $25,000 or less, there are a number of companies that offer guaranteed acceptance whole life insurance.
With this type of policy, 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 Conclusion
Whole life insurance is complicated and expensive, especially if you are buying it for the wrong reason.
Ask lots of questions. If you don’t understand how the whole life insurance policy works after your agent explains it, you shouldn’t buy it.
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