While it might not be as commonly purchased as term life insurance, whole life insurance is definitely one of the most popular kinds of coverage. Whole life caters to a specific demographic of customers — those who want lifelong coverage as well as investment and savings tools, and have the means to pay for it. Let’s take a look at how whole life insurance works and whether it’s right for you.
- How Does Whole Life Insurance Work?
- Types of Whole Life Insurance
- Universal or Adjustable Life
- Variable Life
- Variable-Universal Life
- Who Would Benefit From Whole Life Insurance?
- Pros and Cons of Whole Life Insurance
- Buying a Whole Life Insurance Policy
- Whole Life Insurance versus Term Life Insurance
How Does Whole Life Insurance Work?
Because there are so many financial wheels in motion, we strongly recommend working with a financial advisor and a life insurance agent as you shop for, and purchase, a whole life insurance policy.
Both industry professionals can help you:
- Compare quotes from several insurers.
- Look at the insurance company’s financial strength.
- Research the company’s reputation for customer service and claims.
- Select the best amount of coverage for your family’s needs.
- Determine whether any policy riders would benefit you.
- Understand your policy’s rate of return on cash value.
- Thoroughly go over the different approval processes.
Once you settle on a policy that’s right for you and your family, you’ll be covered for life (as long as you pay your premiums, of course). Your death benefit will cover everything a term life insurance policy covers, including:
- Medical bills and funeral expenses.
- Replacing lost income.
- Paying large debts like a mortgage and car loans.
- Settling estate debts.
- Education costs.
- Assistance raising children and dependents with long term care needs.
Additionally, a whole life insurance policy:
- Accumulates a cash value.
- Can act as a savings and investment tool.
- Can be borrowed against during times of financial need.
Not all whole life insurance policies are exactly the same, and your advisor and agent will help you fully understand these benefits.
Types of Whole Life Insurance
Whole life insurance is a type of permanent life insurance; there are several other kinds, all similar to whole life. Your insurance agent can help you determine if another kind of permanent life insurance is right for you. For now, take a look at the basics:
Universal or Adjustable Life: This policy is a bit more flexible than regular whole life insurance. Sometimes you can adjust the death benefit, upon passing a medical exam, and you might be able to adjust your premium after you’ve accumulated a cash value.
Variable Life: You can use the savings account with this policy as a way to invest in stocks, bonds, and money market mutual funds. This can help you policy grow quickly, but you’re risking your death benefit and cash value if the investments don’t perform well.
Variable-Universal Life: This policy combines features of both variable and universal policies. You can take advantage of investment options as with variable, and premium and death benefit adjustments as well universal.
Who Would Benefit From Whole Life Insurance?
Whole life insurance policies mostly benefit people who:
- Want lifelong coverage and have the budget to pay for it.
- Are interested in using the life insurance policy as an investment and savings tool, as an inheritance, or for estate planning.
- Will be leaving behind a dependent with costly care needs.
Pros and Cons of Whole Life Insurance
- Coverage for life.
- Premiums stay the same.
- Accumulates a tax-deferred cash value.
- Can borrow against or surrender the policy.
- Premiums are more expensive than term policies.
- Cash value will be low if you surrender the policy early.
- Any unpaid balance is lost if you pass away before repayment.
- Many people abandon their policies due to cost..
Buying a Whole Life Insurance Policy
As you’re shopping for a whole life insurance policy, remember:
- Cost isn’t everything, but it pays to shop around for a premium that fits your budget — especially when whole life insurance tends to be on the pricier side as it is.
- Because whole life insurance policies can include a lot of financial bells and whistles, consider working with a financial advisor as you shop for and ultimately purchase a policy.
- Pay attention to the details. Your whole life insurance policy is a legal document, so you need to fully understand what’s required of both you and your insurance provider before you finalize the deal.
Head over to How to Buy a Life Insurance Policy for more on naming your beneficiary, determining how much coverage you need, how companies price policies, and more.
Whole Life Insurance versus Term Life Insurance
Whole life insurance and term life insurance are the two main kinds of life insurance. While whole life policies offer several perks — especially financial savings and planning — to a specific demographic, term life policies tone things down a bit for those who want to keep it simpler:
- More affordable premiums.
- Coverage for a specific time period.
You can learn more about term life policies to see which is right for you.
Whole life insurance policies are ideal options for people who want both a life insurance policy and a savings and investment tool. In addition to a death benefit, whole life insurance provides options for inheritance and estate planning. You can borrow against your whole life policy, but any unpaid debt left at the time of your death is deducted from your death benefit. Canceling a whole life insurance policy is more complex than canceling term life insurance. Depending on the whole life policy terms you have and the age of your policy, you may forfeit some of the cash value of your policy.