Whole life insurance can be a complicated concept. That may be partly due to the use of terms that are used in the information, and the lack of a clear explanation. This simplified guide was created so that you can gain clarity about whole life insurance.
What is whole life insurance?
It is a type of insurance that — as long as the premiums have been paid — will last through the whole life of the insured, hence the phrase whole life insurance. Once the insured person passes, the insurance money is left to the beneficiaries that are listed on the policy.
Differences in whole life insurance and term life insurance
Term life insurance tends to be the easiest for people to understand. If you line the differences up side by side, whole life insurance begins to make a little more sense. These are the major differences between term life insurance and whole life insurance:
1. Term life covers the insured for a set term from 5 to 30 years while whole life covers the insured for their entire life as long as premiums are paid.
2. The money you pay into term life insurance disappears after the term is up, so unless you pass during the specified term, it is basically throwing money away. The money you pay into whole life insurance remains available through your entire life and passes to your beneficiaries when you die. As long as the policy is active, the money stays until you need it. It even builds cash value that you can get access to while you are living.
3. Term life provides more coverage for lower premiums. Unlike whole life where a payout is guaranteed, the insurance company will probably not have to pay out on a term life benefit. Therefore, charging lower premiums is not much of a risk for them.
4. People who choose a term life policy are typically concerned with the term they have agreed to pay. A parent might choose a term that is long enough to get their kids off to college, or a spouse might choose a term that will last until the mortgage is paid off. This protects their loved ones from having to worry with those bills should something happen to the insured. When the term is up, they stop paying the premiums or get a new policy. Those with whole life are concerned with leaving money behind after their death.
What is the cash value all about?
Perhaps the easiest way to consider this is to look at the whole life policy as a savings account. Imagine that you decide you want to leave $100,000 to each of your children when you pass. You go to your bank and explain what you are hoping to do, so they open a savings account strictly for this goal. You then agree on an amount that you will deposit into the account every month.
You commit to leaving the money that you deposit alone. If you do not, there will be financial consequences. However, that monthly deposit gains interest, which you are allowed to get. That interest would be the equivalent of the cash value, in this case. You can use that cash value throughout the time you are alive. The downside is that when you pass, the cash value is transferred to the insurance company, not your beneficiaries. They still get the insurance payout, but not the cash value.
Pros and cons of whole life insurance
Everything has both ups and downs, and whole life insurance is no exception. The good things about whole life insurance are:
– It stays so long as you keep the policy active. If premiums are paid and your cause of death is covered, there is a guaranteed payout to your beneficiaries.
– Your premiums usually do not fluctuate, so your monthly payments are fixed through the life of the policy.
– Of course, being able to use the cash value when you are living is a good thing.
The not so good things are:
-The premiums are higher than term life due to the fact that a payout will occur.
– Any remaining cash value transfers back to the insurance company instead of your beneficiaries.
– There are typically fees and taxes charged to withdraw your cash value.
Five types of whole life insurance to choose from
Some people do not want to make payments their entire lives. Fortunately, there are five main types of whole life policies that offer different payment options.
– Traditional whole life is the policy on which your payments remain the same throughout the entire payment period.
– Single premium whole life allows policyholders to make one large upfront payment that covers the entire policy.
– Limited whole life falls in between the previous two options. This does not limit the length of time you are covered- you are still covered for life. The limited part simply means you will pay on it for a limited time. You choose a term, such as 20 years, and the price of the policy is spread over that time. When that time is up, your policy is paid in full.
– Modified premium whole life starts with lower premiums, and they begin to increase as time goes on.
– Survivorship whole life is the last of the main types. In short, this policy covers two people, such as spouses. This is a cheaper option than paying two separate policies. However, the payout is only made once both parties have passed, so the other spouse cannot use it.
Whole life insurance is made to sound much more complicated than it actually is. It is actually easy to understand when it is broken down. This simplified guide should provide you with the information you need to understand how it works and decide if it is the right life insurance for you.