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Life insurance providers offer a number of different types of policies that each have their own advantages and disadvantages.
The two main types of life insurance options include whole life and term life. Term life policies last for a set period of time, while whole life policies last for the insured’s whole life.
There are several types of policies that fall under these two main categories, further allowing you to customize your coverage. Whole life insurance can be beneficial if you’re looking for a long-term investment with both a death benefit and an accumulated cash value.
What Is Whole Life Insurance?
Whole life insurance policies, sometimes referred to as permanent life insurance policies, are a type of life insurance policy that guarantees your beneficiaries will receive your death benefit so long as you maintain the conditions of your insurance contract. The policyholder pays premiums, and the policy lasts until the insured’s death, no matter when this death occurs. These policies have a death benefit that is paid to the beneficiaries after the insured’s death in addition to a savings component referred to as the cash value, which accumulates over time.
Each time you make a premium payment, your life insurance provider will contribute a small percentage of your premium to your policy’s cash value component. Unlike your death benefit, you have the option to access the cash value of your policy during your lifetime.
For example, if you run into a financial emergency, you may have the option to take out a loan against the balance of your whole life insurance policy’s cash value component. As your cash value grows over time, your whole life insurance policy may become an important tool you can access during your retirement period, allowing it to act as more of an investment vehicle rather than a static protection for your beneficiaries.
How Does Whole Life Insurance Work?
A whole life insurance policy has a death benefit and a cash value. The death benefit is the set amount that will be paid to your beneficiaries upon the your death. The beneficiaries who receive the death benefit typically do not need to pay taxes on the money they receive, but there are certain circumstances where it may be subject to certain taxes. There are no use restrictions for a whole life policy, which means the beneficiaries can use the death benefit for estate planning, funeral and burial costs, debt settlements or any other type of expense that they believe is appropriate.
The cash value is the saving component of a whole life insurance policy. The cash value can serve as a source of equity as the policyholder can make payments larger than the premium, with the excess going into the cash value sum. In addition, the cash value can be accessed while the policyholder is alive, which is not a benefit included in term life insurance options.
The policyholder can request a withdrawal of funds or can borrow money against the cash value while they are still alive. When a loan is taken out, interest is charged at a rate that varies between each insurance provider. If a loan is not paid back, the outstanding amount will be taken out of the death benefit when it is paid out to your beneficiaries. When withdrawing from the cash value, the cash value will decrease, which means that you’ll have access to less money over time.
Whole life insurance policies are eligible for riders. Insurance riders are enhancements or modifiers added to an existing policy that can be purchased to extend the limits of your coverage, including when your death benefit can be accessed. Some examples of common riders found on whole life insurance policies include an accelerated death benefit rider, critical or terminal illness riders or accidental death riders.
Eligibility for a whole life insurance policy is dependent on a few different factors, including gender, age, employment status, lifestyle and medical history. Most insurance providers will require you to undergo a medical examination before they will insure you. During the medical exam, you can expect to undergo most of the same processes you would when seeing your doctor for your annual physical. Your insurance company may request blood work, ask you about your history of illnesses in your family, whether you smoke or not and more general questions about your health.
Though there are a few select insurance providers that offer whole life insurance policies without a medical exam, these policies usually come with high premiums and limited death benefits.
Benefits of Whole Life Insurance
Whole life insurance policies have several benefits. The top benefit that they never expire. As long as you pay the premiums, your policy — and subsequently, your policy’s death benefit — will not expire. Your loved ones will receive the death benefit no matter when you die, unlike a term life policy that only lasts a certain term and then expires, requiring you to purchase a new policy or to continue without life insurance coverage.
An additional benefit is that the premiums of a whole life policy will never change. Other types of policies sometimes require or allow you to change your premium payment amounts, but with a whole life policy, the premiums will stay the same the entirety of the policy. This fixed cost offers a level of stability you can’t get with any type of term life policy.
Building cash value is another benefit of whole life insurance, especially because you can take advantage of it while you’re still alive. The cash value will continue to accumulate and can be accessed at any point during your life. Money can be withdrawn from the cash value portion of your policy, or you can borrow against it. The cash value gives you another facet to your overall financial plan for retirement — and as this cash value grows, your whole life insurance policy may play a major role in your financial planning.
Whole life policies are also eligible to earn dividends. Some insurance providers may pay dividends if there is surplus profit that can be used as cash for expenses, reinvested into your policy or to pay a portion of your premium payments.
Whole life insurance policies also have several tax advantages. The death benefit itself is tax-free, so your loved ones won’t be forced to pay taxes on the payout under most circumstances. In addition, if you borrow against your cash value, you don’t have to pay taxes on the amount as long as you pay the loan back on schedule. The cash value grows tax-deferred, meaning you won’t owe taxes on the growth unless you choose to surrender your policy and take the money.
Compare Whole Life Insurance Providers
The insurance company you choose to provide your life insurance policy is almost as important as the type of policy that you choose. Doing your research to ensure you’re choosing the best company can help make your search for coverage easier. Benzinga offers insights and reviews on the following insurance companies, which may provide you with a place to begin your search for permanent life insurance policies.
Should You Purchase Whole Life Insurance?
Whether you’re looking for permanent whole life coverage or affordable term life insurance, the best way to compare your options is to start researching well before you need coverage. This is especially true when shopping for a whole life insurance policy, as you can secure a lower premium by enrolling in a policy early. Remember to return to Benzinga to learn more about the many types of life insurance available to you.
Frequently Asked Questions
What are the disadvantages of whole life insurance?
There are several disadvantages of whole life insurance, including expensive premium payments that cannot be increased or decreased, loans that are subject to interest and a slower-building cash value if you sign onto your policy later in life. Because premium payments are more expensive, you may not be able to afford a death benefit that is big enough to support your loved ones when you’re gone, which is a major disadvantage.
Are whole life policies worth it?
Whole life policies can be worth it if you’re looking for insurance coverage for your entire life. It’s typically a better investment if you’re younger and looking to accumulate money to pass onto your family, otherwise it may not be a good investment for you. The premium payments may be too much of an undertaking for some people, but the cash value and guaranteed death benefit could make it worth it if you’re financially able to make the payments.
Benzinga crafted a specific methodology to rank life insurance. To see a comprehensive breakdown of our methodology, please visit our Life Insurance Methodology page.
About Sarah Horvath
Sarah is an expert in the insurance, investing for retirement and cryptocurrency space.