What is Whole Life Insurance
Whole Life Insurance is the gold standard of life insurance policies. This type of permanent life insurance is one of the most misunderstood financial products on the market today. By the end of this section, you will better understand how whole life insurance works, who benefits from it, and why people buy this type of policy. You will also see how other insurance products contrast with whole life coverage, so you’ll feel confident choosing the policy that’s appropriate for you.
In addition to providing a guaranteed death benefit for life, typically with guaranteed level premiums for life, whole life policies develop significant guaranteed cash values over time which the policyholder can access. And the policy’s cash value grows year by year, guaranteed as well. Those guaranteed cash values are usually enhanced by dividends which are declared annually by the insurance company. So even though a whole life policy costs more, its overall value can be quite substantial.
As with shopping for any other kind of product, price is certainly a factor in any buying decision. But what you get, versus what you pay is the true measure of value. No one wants to “overpay.”
Premiums can be structured to stay level for as long as you live. Or, if you wish, they can be paid over a shorter period, such as 20 years, 10 years, or even a single premium…for a lifetime of guaranteed coverage.
For customers who want the best of everything, whole life insurance is truly an amazing financial instrument.
Cash Value of Whole Life Insurance
A portion of your Whole Life policy’s premium is set aside and accumulates as cash value. Over time, this cash value accumulates on a tax-deferred basis.
This cash value can be borrowed against or can be received as payment if the policy is canceled.
In the event that you decide that you no longer need, want, or can afford your Whole Life policy, you are entitled to surrender the policy and receive the cash value. (Note: The cash value of a policy is not the same as the face amount that’s paid out as a death benefit to your beneficiaries. Neither is it in addition to, it is only a portion of the total face amount!)
Borrowing Against Cash Value
When you borrow any portion of the cash value from your Whole Life policy, the outstanding loan will reduce the face value (or death benefit) until the withdrawn funds are repaid with interest. Many financial pundits don’t fully understand whole life and, as such, often criticize it. It IS significantly more costly than term insurance. But interestingly, it’s hard to find a person that has owned whole life for over 20 years that’s not happy with it. The “forced” savings aspect of this type of product is highly UNDER-rated. Many folks, do not have the discipline to save money long term. So this product, for some people, is often the place they have accumulated the most money over their lifetime (other than, perhaps, the equity in their home).
Whole Life vs. Term Life Insurance
Whole Life insurance is designed to stay in force until you die, with no increase in premiums. In contrast, Term Life Insurance is designed to provide temporary coverage for a set duration of time, typically 10, 15, 20, 25, 30 or 35 years. A Whole Life policy lasts for a lifetime, while Term Life insurance ceases, or becomes ridiculously unaffordable, after the specific policy’s term ends, leaving you with no coverage. A Whole Life policy accumulates cash value throughout the life of the policy, which can be borrowed against. By contrast, a Term Life policy accumulates no cash, so there’s no available cash value to borrow against.
Participating vs. Non-Participating Whole Life Insurance
Some Whole Life insurance policies are issued by “mutual” companies. If they are, the policies are generally considered to be “participating” or “par” policies…entitling the policy owner to receive dividends. Mutual companies have no public “shareholders,” so any excess profits of a mutual life insurance company can be returned in the form of dividends to the policy owners.
Participating Insurance
A Participating Whole Life policy pays monetary dividends. Since you are “participating” in the surplus earnings of the insurance company, you are entitled to receive a share of the excess profits in the form of dividends, which while never guaranteed, are NON-income taxable. In this type of insurance, the policyholders own the company, similar to owning shares in a publicly-traded firm. These dividends can be:
- Paid in cash
- Used to reduce your premium payments
- Left to accumulate at a specified interest rate
- Used to purchase paid-up additional insurance, which will increase your coverage’s face amount.
(Note: Dividends are not guaranteed to be paid)
Non-Participating Insurance
A Non-Participating Whole Life policy receives no extra dividend payments. Unlike a Participating Whole Life policy, the policyholder is not sharing in the surplus earnings of the insurance company. However, this type of policy still has a level premium and face amount during the entire life of the coverage.
Premium Options
Level Premium
Level Premium Whole Life Insurance (sometimes referred to as “ordinary whole life”) provides a lifetime death benefit and level premiums for the life of the policy (until the death of the insured).
Limited Payment
Limited Payment Whole Life Insurance allows you to pay premiums for a limited period of time but still provides lifetime protection. If you choose this option, you can pay off your policy more quickly, by paying higher premiums than traditional coverage. You can pay these larger premiums over a set number of years (e.g. 10 payments or 20 payments). Limited payment plans can also be based on age (e.g. whole life plans up to age 65 or to age 85).
Single Premium
Single Premium Whole Life Insurance is a limited payment whole life plan that is paid for by one large premium payment that is due at issue. In other words, the policy is paid-in-full at the time that policy first goes into effect, with no further premiums due thereafter. Once issued, the policy will have immediate cash value and loan value. This type of policy is more typically used for investment purposes than other forms of life insurance.
Disability Waiver / Rider
Some Whole Life policies include a disability waiver/rider feature that will pay your premiums for you if you were to suddenly become disabled. Can you think of any other financial product that allows you to put money away each year…and promises that if you can’t continue to make new payments due to being disabled…that same financial institution will make those payments FOR you?
Whole Life Insurance Offers
- Beneficiaries receive the policy’s death benefit no matter when the insured dies
- Predictable, fixed premiums for the life of the policy (in most cases)
- Cash value that can be withdrawn or borrowed against (in some cases)
- Safe, predictable, and positive growth
- Policy cash value that’s tax-deferred
How much life insurance do I need?
How much insurance you need is a function of your unique individual situation. As a result, following a “rule of thumb” is not necessarily the most responsible advice that we could give you. However, there are some tricks that we have learned over the years. Our How Much Life Insurance is Enough web page can provide essential information that can help you determine how much coverage you really need. By using our easy-to-use life insurance needs calculator, you can quickly get an actual estimate in just seconds.
Whole Life Insurance Quote
Get the Best Quotes for Whole Life Insurance
Call Accuquote today at 800-442-9899 and we’ll help you figure out what kind of policy makes the most sense for your needs. You can also click the “Get Started” button to get a free online Whole life Insurance quote. It’s quick and easy.
