What you need to know about whole life insurance before you buy
Whole life insurance, also known as normal life, or permanent life insurance, provides lifetime protection for a specified amount. Whole life is basically term insurance with the addition of an investment component. Whole life insurance has many advantages over term life insurance.
Advantage
Whole life policies are generally a bit more expensive, but they work especially well for estate planning, because the policy can be set up to pay estate taxes on death. This can save the heirs hundreds of dollars because the estate does not have to be liquidated through the government. Other advantages of whole life insurance include:
The value of the policy grows over time due to the investment aspect of the plan. The policy owner can also decide how to use the dividends from a whole life insurance plan. They can be used to pay premiums, buy more insurance, or be paid in cash to the policyholder.
Premiums remain level for the life of the policyholder. With this in mind, it’s often better to buy when you’re younger for lower premiums.
Whole life insurance has a guaranteed cash value. This means that part of the money paid in the policy accumulates guaranteed cash values. If you decide to surrender the policy, which means you sell it before the policyholder’s death, the cash value is available for your use. The policyholder may also use the policy to borrow money against the cash value as a policy loan at the current policy loan interest rate.
Accumulated cash value can be used at retirement to supplement retirement income.
· Cash value is tax deferred until you withdraw it.
A portion of the premium goes toward its cash value. In this way, the entire policy could be paid in a few years.
· Unless you make a change to your policy, you don’t have to have any other medical exams to keep your insurance.
Different Types of Whole Life Insurance
The most common type of whole life insurance is traditional, interest sensitive, and single premium. Traditional has a guaranteed minimum rate of return on the cash value. Interest sensitive has a variable rate of return on the cash value, like an adjustable rate mortgage. This gives the policyholder the ability to increase the death benefit without increasing premiums. Single premium is when a person has a large sum of money to purchase a policy in full upfront. This type of whole life insurance still has the same tax deferral and higher cash value.
When you should not put your money in Whole Life Insurance
Whole life insurance should not be used as an investment tool. Most experts agree that even with the benefits of tax deferral, a whole life policy is not a good way to make long-term investments. If you’re looking for an investment strategy, there are other options that will give you a higher rate of return and cost less. There is also what is known as a “lost opportunity” cost. This happens because your money is tied up in a whole life policy, when you may have been able to use it to invest in other options that would have provided you with more value than the insurance policy. It is best to speak with a financial advisor to determine if a whole life policy is right for you.