As implied by the name, whole life insurance protects the policy owner for their whole life, rather than for a specified period of time as with term life insurance. In most cases a whole life insurance policy death benefit and monthly premium will never change. In addition, whole life plans build cash value which is the amount that the insured would receive back if they canceled the policy. The cash value is tax deferred until it is withdrawn and an insured can borrow from a whole life plan.
Available Policy Choices
There are three whole life policy choices available to consumers; traditional, interest-sensitive and single premium. Traditional whole life is the most popular. With traditional whole life, the policy holder is guaranteed a minimum of a return on the cash value portion. Interest-sensitive whole life is more variable as far as your cash value; which can have investment benefits and can also have repercussions. Single premium is an option utilized most often by the wealthy because they pay the large sum up front; and it is subject to the same tax deferred benefits.
One benefit of having whole life is that a portion of your premiums build towards a cash value and could pay off your entire policy after a few years. In addition, the premiums remain constant unless you make a change and if you do not make any changes you will have lifelong coverage without having to be subject to future medical exams. And finally, another benefit is the tax savings associated with whole life because the cash value is tax deferred until withdrawn. These benefits are different from term life insurance benefits.
Term Life Insurance Explained
Term life insurance was designed more for temporary life insurance coverage. Term life insurance offers a lower premium for individuals on a tighter budget as well as the flexibility to purchase a plan for a desire amount of time. Many individuals will purchase term life insurance for the time that their children are young, or while they owe a hefty balance on their mortgage. The maximum term on a term life insurance policy is 30 years but term life allows a term as low as 1 year. Term life insurance is simply much more affordable than whole life; whole life insurance is expensive.
Whole Life is an Investment
With whole life you are not just paying for the insurance, you are paying for the investment portion as well and this is the primary reason why it is so much more expensive than term life. In addition, many people think of whole life as an investment opportunity for retirement when truth-be-told, there are many more effective ways to build a retirement portfolio than by using whole life insurance. In fact, in most cases with whole life you do not know even know how much of your premium goes towards your investments.
There are obviously benefits to both whole life and term life insurance. Whole life is a great plan for many consumers and it really just depends upon an individuals’ personal situation. The important thing is to understand the way whole life works compared to term life so that you can make the best decision for yourself and your family. Whole life insurance protects you for your entire life, without worrying about becoming uninsurable or having to pass medical exams. In addition, you can keep your set premium and death benefit for the life of the plan, and utilize the tax benefits.