Whole life insurance is considered as the most basic type of permanent policy. This insurance pays out the death benefit to beneficiaries. Its cash value also accumulates and you can tap into this during your lifetime. However, just like other lifelong forms of coverage, whole life insurance can be quite expensive.
Whole Life Insurance – A Short Definition
Whole life insurance policy offers coverage that can last your entire whole life, as the name suggests, provided that you can continue paying your premiums. These premiums remain the same during the life of your policy so you will know the exact amount you will pay every month.
A whole life insurance policy is different from term life insurance in the sense that this policy earns cash value on the portion of the premium.
How Whole Life Insurance Works
There are two parts to whole life insurance – a savings component and a death benefit. With death benefit being guaranteed, it means that the beneficiaries will receive the payout once the plan holder passes away. On the other hand, the savings component is known as the cash value that you can take advantage of while you are still alive.
The Cost of Whole Life Insurance
Whole life insurance substantially costs more compared to term life because of several reasons.
For starters, term life insurance is only temporary. This doesn’t accumulate cash value. If you think of life insurance as a game of risk, insurers can consider term life to be a good gamble since many people can live longer than their policies. Once this happens, there is no need for insurers to spend cash for the payout of the death benefit.
Whole life insurance provides a guaranteed death benefit and permanent protection. Provided that you keep up with the premiums, the insurer is going to pay the beneficiaries once the plan holder dies. This kind of coverage got cash value as well and guarantee investment return rate on a part of the premium.
This is an investment and this is why the amounts of coverage are also higher.
Benefits and Drawbacks of Whole Life Insurance
Policies for whole life insurance have their own pros and cons:
Benefits
- Usually utilized as mandatory savings
- Peace of mind knowing you have a lifelong protection
- Guaranteed death benefit
- Cash access once circumstances change
- Premium stays the same during the policy’s life
- Possible earnings for dividend that can be withdrawn or come in handy to reduce premiums and increase cash value
- Cash value portion continues to grow every year with guaranteed interest savings
- Could be used for saving money as a retirement fund
Drawbacks
- Coverage is not as flexible
- Higher premiums than term life insurance
- Coverage doesn’t keep pace with inflation that can put beneficiaries at underinsurance risk during the time of the claim
- Poor choice of investment since the interest earned on cash value might be lesser compared to other available alternatives of investment
Whole life insurance policies may also have expiration dates with some policies expiring once the plan holder turns 100 or 121 years old. Even if the policy expires, however, the cash value will remain payable.