Under the umbrella of permanent, or cash value, life insurance policies, whole life is arguably the most common among individuals. There are a number of aspects of whole life insurance that should be understood and compared to other types of permanent policies prior to purchasing, including death benefit, cash value accumulation, cost and flexibility of premiums as well as common use. Let’s start with the death benefit portion of whole life.
Death Benefit Coverage
As with other permanent policies, whole life insurance provides a death benefit to the insured that is both level and guaranteed. As long as premiums are paid according to the initial details laid out within the insurance contract, individuals are covered under a whole life policy until age 95 or 100. Other types of permanent policies allow for death benefits to grow or decrease over time, and can be much shorter than the guarantees provided by whole life insurance depending on what the insured selects. Whole life policy guarantees on death benefit proceeds are backed by the claims-paying ability (financial strength) of the insurance company offering the coverage.
Cash Value Accumulation
The greatest differentiation among permanent life insurance policies relates to the potential growth and flexibility of the cash value portion of the policy. Whole life siphons off a portion of premiums paid into the policy to a cash value account that is both guaranteed and predictable. Cash value accounts are managed by the insurance company offering coverage, and are held in what is called a general account. Because of the control the company has over the way a portion of premiums are invested, whole life policy holders are offered a fixed rate of return on cash value accumulation and funds are not allowed to be invested at the policyholder’s discretion. For those looking for a simple, straightforward life insurance policy where cash value is not tied to market performance, whole life may be a sound choice.
Flexibility of Premiums
When an insured purchases a whole life policy, the premium payments are set, level amounts that will not change. The insurance company will base the amount of premium owed on the age and overall health of the insured at the time the policy is taken out, and contractually cannot change the stated premium level or amount throughout the duration of the policy. As long as the stated premiums are paid, the death benefit and cash value amount are guaranteed. This proves to be beneficial for individuals who are on a fixed income or who want to easily and clearly budget out premium payments over the course of policy ownership.
Although premium amounts are fixed, individuals who are considering a whole life policy do have options related to how long they wish to pay premiums. Generally, most policyholders select to pay premiums over the lifetime of the policy to keep the outflow of cash for life insurance coverage manageable; however, policyholders also have the option of paying until a certain age or policy year in order to free up cash flow down the road. This strategy, known as a limited pay premium schedule, may work well for those who have a higher income now, or those who do not want to carry insurance premium payments into retirement years.
Common Uses of Whole Life Insurance
Whole life insurance provides individuals the straightforward coverage they need throughout a lifetime with clear expectations for premium payments, predictable cash value growth as well as guarantees on death benefit coverage. This type of policy works well for long range insurance needs, and although it may be more expensive than term insurance in the early years of the policy, can provide a cost-effective way to purchase permanent coverage as premiums are set and level for the duration of the policy.
For individuals looking for more flexible premium payments or diversification in cash value investment options, whole life insurance may not be the best fit. The insurance company controls how individuals’ premium payments are invested within the general account, and determines what rate of return will be paid to the insured through the cash value account. Other permanent insurance policy options, including universal and variable life, provide a greater level of flexibility within a policy but also have various aspects that differ greatly from whole life. In order to make the best decision for you and your family, it is important to compare each type of policy and understand the intricacies of each.
Up Next… Universal Life Insurance – Explained
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