What Is Whole Life Insurance?
Also called cash value insurance, whole life insurance policies last your whole life. While you can buy life insurance plans that last 20, 30, or 40 years, that is not your only option. Whole life plans offer coverage that your entire life, not just a few decades.
Who Should Get Whole Life Insurance?
In general, you should first look at term insurance or group plans before considering whole life insurance. These options offer lower rates, either by limiting the length of the policy or by limiting its coverage.
While these plans cost less, they do expire after a set period, making them expensive to renew. If you want a plan with a better guarantee of money, tax-free savings, or a bigger payout, you might be considering whole life insurance.
Before getting whole life insurance, you’ll need to consider carefully what you need out of a plan. Many people warn against whole policies since they’re more expensive—up to 5 to 12 times the cost of other types of insurance. But if you need a cheaper way to save up your money, look into additional saving options.
401(k) v. Whole Life Insurance
Because of the cost, experts in the field tend to recommend a 401(k) before whole life insurance. Not only does a 401(k) offer a better rate of return, it also allows you more flexibility in how and when you spend. (Usually you can access this account by age 55.) But if your company does not offer a 401(k), or you’ve already maxed out your savings plan, whole life insurance can be a good way to diversify your portfolio.
How to Use Your Whole Life Policy
Whole Life and Final Expenses
Overall, insurance is meant to cover a person’s final expenses: funeral costs, planning for estate taxes and fees, providing an income for a surviving spouse or children, and even supplementing retirement income.
While a 401(k) or regular savings account can do all these, a lot of the money in insurance policies are not subject to income tax and other fees.
Tax Benefits of Whole Life Insurance
If you’re interested in a low-tax savings or retirement plan, look into whole life insurance. The death payout of a policy is not taxed by the government. Only if your plan earns interest, or you leave your policy to an estate instead of beneficiaries, will your plan be subject to the IRS.
Also, if you have living benefits and take advantage of your insurance while you’re still alive, you might be charged an income tax. In most cases, your beneficiaries will only be taxed on any interest that’s earned by the policy, or its cash value.
Cash Value of Whole Life Insurance
Whole life insurance is also one of the only types of insurance that offer guaranteed cash value accumulation. Cash value allows your plan to earn interest and investment gains. Also known as the cash surrender value, it’s equal to whatever your provider would offer you if you cancel your plan.
You can use this money to pay for premiums, increase your plan’s worth, or pay off various fees on your policy. Insurers also allow business owners to access a quick source of money, covering expenses or sick leave. However, make sure your provider won’t increase your premium if you withdraw directly from the cash value. If they do, another way to get money from your plan cash value is through a loan.
Loans and Life Insurance
Whole life insurance allows you to borrow loans against its cash value. Not only can the loan not be rejected, it also usually comes with great interest rates—as low as 5%. Borrowing from your policy can be helpful if you’re making a big purchase, like a mortgage down payment. Some insurers even increase your plan’s cash value when you take out a loan!
However, be careful about paying back the loan and interest. Failing to do so can decrease the payout or collapse the plan.
Most plans are tax deferred, which means the IRS only comes calling once the plan is cancelled. If you lose coverage, you or your beneficiaries might get stuck paying taxes for those loans, even though you’re no longer getting a payout.
Lapses on Whole Life Insurance
Whole life policies can lapse if you fail to make payments, either on the policy itself or on the interest for loans you take out on the principal.
If you want to reinstate your coverage, usually insurers can revive your policy 3 to 5 years after it has lapsed. Before reinstating, you’ll need to complete another medical exam or questionnaire. Be up-front with any health changes and avoid voiding your newly reinstated policy.
While a policy can be forcibly closed, sometimes policyholders choose to voluntarily let their coverage lasp. Why? If you’re able to borrow against the value of the policy and pay off any interest charges, you can essentially “cash out” your policy. This may be a good option for quick cash or if your life insurance policy was taken out by your parent or guardian.
Besides withdrawing your cash value or borrowing against your policy, another way to get money from whole insurance is through a life settlement. With a life settlement, you sell your policy to a buyer for a lump sum. The lump sum will be higher than the policy’s cash value, allowing you to make quick money off your policy.
In exchange, they take responsibility for paying the premiums, and you surrender the full death benefit. Policyholders might choose this option if they need cash while still alive or reaching the end of their policy.
Whole coverage ends when the policyholder dies or reaches the maturity date. The maturity is essentially the policy’s expiration date and is usually set at 95, 100, or 120. If a policyholder does age out of their plan, the insurer will offer them their policy’s cash value as a lump sum.
Kinds of Whole Life Insurance
There are many different ways to customize your whole life insurance. One of the major differences between plans is whether they’re participating or nonparticipating.
Participating v. Nonparticipating Insurance
What sets participating policies apart is that they give out dividends to their policyholders. What are dividends? They’re payments made to you based on your cash value and how much the company makes in a given year. Think of it as a bonus or interest earned from your policy’s value.
Dividends are left over when life insurance providers were organized as mutual companies—businesses where each policyholder also owned a company’s share. Nowadays, some providers have let this practice lapse, offering nonparticipating plans that don’t pay dividends. These plans may instead put extra money toward the reserve of the policy.
Note: The reserve is the amount your insurer needs to cover the policy’s death benefit or how much they payout when a person dies. This amount is how a provider calculates a person’s premiums and how much they can offer in coverage.
Whole Insurance Riders
Besides participating and nonparticipating plans, there are other extra features, called riders, you can add onto a whole life plan. A few common riders include the following:
By adding this rider, policyholders ensure that they don’t need to pay insurance premiums if they become disabled.
Accelerated Death Benefit
If a policyholder becomes terminally ill, this benefit allows them to receive a portion of the payout before they pass away. This rider usually goes into effect if the policyholder has less than a year left to live. It might also be automatically included in a whole insurance policy, so check with your provider before adding.
Guaranteed insurance makes sure you get coverage even if you don’t take a medical exam. If you already have whole insurance, you can still buy extra coverage without an exam using a guaranteed insurance rider.
Term Life Add-On
If you want to increase your policy’s value, try adding a term life policy rider instead of changing your entire life policy. This is because adding a second plan can be far less expensive than changing the original policy. Universal plans can also offer flexible plan options.
Whole Life v. Universal Insurance
Both whole and universal life insurance are considered permanent life insurances, though they have some key differences. While both last your entire life and can be used to save up money, whole life insurance offers a stable face amount or final payout. Meanwhile, universal plans are more flexible and easy to change.
With universal insurance, you can change a plan’s face amount, your premiums’ price, and even how often you pay. Though other policies can offer modified payment plans, this is a built-in feature with universal insurance.
This flexibility attracts policyholders, but it also means that they can end up with more expensive premiums as they get older.
If you’re interested in stable payments, you’ll want to stick with a term or whole policy, or even consider a limited payment policy.
Limited Payment Plans
Another option for whole life insurance is a limited payment plan, also known as a 20-payment policy. Instead of paying premiums for the rest of your life, you’ll only pay for a set period, usually 20 years. Though this will increase your premiums’ price, some policyholders enjoy knowing that they’ve essentially “paid off” their life insurance. Single premium plans take this idea even further.
With single premium plans, you only need to pay one lump sum to get coverage. For instance, for a single payment of $15,000, you might be able to “buy” a plan with a $30,000 death benefit. Talk with providers to see what payment options they offer on whole insurance.
Requirements of Whole Life Insurance
Like with other types of life insurance, whole life policies will determine your premium’s cost based on many factors. Before giving you a quote, you’ll need to provide a list of personal details. Providers often ask for the following:
- Your age and gender
- Height and weight
- A questionnaire detailing your current health, any past conditions, and your family’s health history
- A medical exam (if you don’t have a guaranteed policy)
- Smoking history and habits
- Any history of substance or drug abuse
- Your credit and financial history
- Your driving history (such as DUIs or speeding tickets) or high-risk activities (e.g., skydiving)
- Any history of criminal activity
There are many different parts to whole life insurance. Make sure you have a good understanding of the policy before choosing a plan. Compare with other types of plans, such as term, group, or universal life insurance.
If you’re still looking for an insurance provider, compare quotes online to find the best price for coverage.
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