What is whole life insurance?
A whole life insurance policy can help protect your loved ones from financial risks in the event of death. Here we will cover what whole life insurance is and the best life insurance companies for whole life coverage. If you decide to go ahead with whole life, we’ll also point you to the best whole life policy for you and your loved ones.
Definition of whole life insurance
There are two main types of life insurance: term and whole. To better understand the definition of whole life insurance, it is helpful to compare the characteristics of whole life and term insurance. As the name suggests, term life insurance lasts for a number of years. Once the term expires, the policy expires.
On the other hand, whole life is a permanent life insurance policy. As long as the policyholder pays the premiums on time, the policy remains active. Unlike term insurance, whole life insurance policies include a cash value component. Once your policy has time to accumulate funds, you can withdraw the accumulated money.
How does whole life insurance work?
In six steps, here’s how whole life insurance works:
- You are applying for coverage. The request can be made in person with an insurance agent or online, depending on the company and method you prefer.
- The insurer will thoroughly examine your history to determine if you are insurable and, if so, how much your premiums will cost. Here is a list of what the insurance company will check:
- Height and width
- Credit history
- Criminal history
- Nicotine consumption, including patches and nicotine gum
- Your health history
- Health history of your immediate family
- Substance abuse
- Driving record
- Hobbies and activities that may be considered dangerous
3. Once approved, you will be offered a quote. If you accept the quote, you will sign the insurance documents.
4. You make a premium payment and pay premiums at regular intervals to maintain coverage.
5. When the policy has accumulated sufficient cash value, you can start making withdrawals.
6. If you decide that you no longer need life insurance (for example, if you have already saved and invested enough to support your family in the event of death), you can surrender the policy and receive a lump sum.
Characteristics of whole life insurance
As we will see here, you will likely find that whole life insurance quotes are more expensive than term insurance quotes. The reason has to do with the additional benefits associated with whole life coverage. For example, while it is not possible to borrow against life insurance with a conventional term policy, whole life allows policyholders to take out a policy loan and use the money as cash. emergency. It is important to note, however, that it generally takes around 10 years to build up enough cash to access the cash value of the policy.
Here are some of the other features associated with whole life insurance:
Cash value accumulates with whole life insurance
In addition to a death benefit, whole life insurance allows policyholders to accumulate cash value in their policy. The money grows tax-deferred, much like a 401 (k) plan. A policyholder is not expected to pay taxes during their high income years. Instead, they pay taxes when they start withdrawing funds.
Guaranteed rate of return
In the meantime, whole life insurance companies are offering a guaranteed rate of return on the cash value of the policy. According to Consumer Reports, the average annual rate of return on a whole life insurance policy is 1.5%. Although low, it beats the interest rate of many banking products, including interest-bearing savings accounts and money market accounts (MMAs).
Guaranteed death benefit
A whole life insurance policy is an investment vehicle that pays out death benefits. As long as the contract is still in force on the death of the policyholder, the death benefit chosen by this policyholder at the time of subscription will be paid to his estate.
Pros and Cons of Whole Life Insurance
As with any financial product, whole life insurance has its advantages and disadvantages. The trick is to determine if the advantages outweigh the disadvantages in your situation.
- Premiums are fixed for life.
- The policy creates a tax-deferred cash value at a guaranteed rate.
- If the policyholder decides they no longer need life insurance, they can surrender the policy and receive the cash value it holds.
- If the policyholder cannot make the payments, he can ask to receive the cash value and use these funds to make up the premium.
- This can cost six to ten times more than a term policy with the same death benefit.
- If the policyholder lets the coverage expire, the losses can be costly.
Is Whole Life Insurance Worth It?
The answer is “maybe”. Depending on your situation, all of life can be meaningful. Let’s say you don’t have an investment strategy in place and your monthly whole life insurance premium is the only way to build an emergency fund or receive a guaranteed return. In this case, it may be a good idea to consider your own life insurance policy.
Whole life insurance may be less complex than other types of permanent insurance, such as universal life insurance, but it is still more complicated than term life insurance. If you’re happy to make your own investments and savings, and your only goal is to purchase life insurance to cover your loved ones, term life is cheaper and easier to navigate.
Agents who sell whole life insurance policies say it is an “investment vehicle”. But when you compare the average guaranteed rate on a whole life insurance policy to the average annual return on the stock market, you’ll quickly realize how much money you can leave on the table.
Let’s say you’re looking for coverage and you can’t choose between term life insurance and whole life insurance. You are a healthy 35-year-old man. You are offered a rate of $ 600 per year for a term life insurance policy and $ 3,600 per year for a whole life policy with the same death benefit.
You have two choices. You can pay $ 300 per month for the entire life insurance policy and get an average return of 1.5% on the money accumulated. Or, you can pay $ 50 per month for a term policy and invest the additional $ 250 in the stock market. As you know, the stock market goes up and down. Yet between 1971 and 2020, the average annual return on equity investments was 10.9%.
Even if we were to use a more conservative estimate of 7%, it’s easy to see how investing in the stock market will ultimately pay off more than settling for a low rate of return of 1.5%.
Whole life insurance rates
To give you an idea of the impact history and lifestyle have on rates, each of these quotes begins with a 35-year-old man who asked for $ 300,000 in death benefit.