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Whole life insurance isn’t the most pleasant topic to think about — but when you pass, your family might be relieved you signed up for a policy.
Certain aspects of whole life insurance can make it an appealing choice.
Your premiums and death benefit are fixed.
You can withdraw funds or take out a loan.
You have a guaranteed rate of return.
In most cases, the premium and death benefit stay constant for the duration of a whole life policy.
With fixed premiums and a fixed death benefit, you likely won't have to worry about cost increases as you get older, and your loved ones will know the amount of life insurance proceeds to expect when you do pass on.
A whole life policy can serve as a source of emergency funds for you if something goes wrong; you may be able to take out a loan against the policy. That's because a portion of each of your premium payments is funneled into a savings component of the policy called the "cash value."
Over time, the cash value builds, and you're able to withdraw funds or borrow against it. The rules on how and when you can do that vary by company. And there are guidelines to follow, so that you don't inadvertently reduce the death benefit or create a tax burden1.
The cash value of a whole life insurance policy is guaranteed to earn a minimum amount of interest.
Life insurance pays out after your death to the people you designate as beneficiaries — usually children, a spouse or other family members. It’s an important safety net if anyone depends on you financially. The life insurance payout can pay debts such as a mortgage, replace your income and provide college tuition funds.
No matter what type of policy you buy, life insurance consists of these four components:
Policyholder The person who owns the life insurance policy. Typically, if the policyholder dies, the death benefit is paid out, but it’s possible to take out a policy on someone else.
Beneficiary The person, people or institution(s) that receive money if the policyholder dies. There can be more than one beneficiary named on the policy.
Premium The money paid monthly or annually to keep a policy active (or “in-force”). If you stop paying premiums, the policy lapses.
Death benefit The money paid out upon the event of the policyholder. Life insurance goes into effect as soon as you make your first premium payment, meaning you’re eligible for the death benefit as soon as the policy is in force.
Insurance companies always pay the death benefit, except in specific circumstances where they aren’t obligated to like:
The policyholder outlives their term life policy
The policy lapses or is canceled
The death occurs within two years of the policy being in-force and the insurance company finds evidence of fraud on the application
Term life insurance covers a limited time period, such as 10, 20 or 30 years, and does not build cash value. If you die within the term, your beneficiaries receive the payout.
Permanent life insurance costs more than term but offers additional features like cash value that you can borrow against and grows over time. Whole life is the best-known form of permanent life insurance. Other types include universal, variable and variable universal.
Guaranteed Universal life insurance promise a certain death benefit, and payments don’t change. There’s typically little or no cash value within the policy, and insurers demand on-time payments. Missing a payment could mean you forfeit the policy. And since there’s no cash value in the policy, you’d walk away with nothing if you forfeit. If you’re sometimes late with bills, this is not the product for you. In addition, consider that future financial or health problems could cause you to miss a payment.
Indexed universal life insurance links the policy’s cash value component to a stock market index like the Standard & Poor’s 500. Your gains are determined by a formula, which is outlined in the policy.
Variable universal life and variable life insurance, you tie your cash value to investment accounts, such as bonds or money market and equity accounts. There can be high risk to the investment account value based on the market, but if you do have cash value, you can take partial withdrawals or loans against it.
With simplified issue life insurance, you won’t have to take a medical exam. You’ll be asked a few health questions, and you could be turned down based on your answers.
Guaranteed issue life insurance: There are no medical exams and no questions asked. You can’t be turned down. This is the most expensive way to buy life insurance, and you might find only low coverage amounts available, such as $50,000 or $100,000.
Mortgage life insurance covers the current balance of your mortgage and pays out to the lender, not your family, if you pass away.
Joint life insurance insures two lives, usually those of spouses, under one policy:
First-to-die: Pays out upon the death of the first person, whichever one it is. The surviving spouse typically would be the beneficiary. The policy would then expire; it doesn’t continue to cover the second person.
Second-to-die: Pays out when both people have died. A policy like this typically is used when heirs, such as children, will need money to pay estate or inheritance taxes, so that they don’t have to sell off assets.
Whole life insurance isn’t a purchase you make often, so you may not know where to start or how to get whole life insurance quotes.
The amount of life insurance you need depends on your family’s needs and priorities. Do you have debts to pay? Will your family need to replace your income to meet everyday living expenses? Do you want to fund a college education for your children?
Life insurance companies use life expectancy as the basis for determining rates. Anything that could shorten your life expectancy could lead to a higher price. Your age, gender, medical conditions and family’s health history are all taken into consideration.
So it’s smart to buy life insurance as early as possible, when you’re young and healthy. If you wait, your life insurance quotes will increase solely because of your age. If new health problems arise, your rates could go up even more.
But if you already have a health issue, don’t let that stop you from getting life insurance quotes. Insurance companies vary in how they view pre-existing conditions, and some types of life insurance don’t require a medical exam.
A whole life insurance policy provides a set amount of coverage for your entire life. As long as you pay premiums, your beneficiary will receive the benefit amount upon your death. Whole life policies also build up "cash value" from part of the premium being invested. It’s possible to access that cash value as the funds grow.
Cash value is a crucial selling point for whole life insurance: It's an account within your policy that builds up over time, tax-deferred. Your premiums fuel a portion of your premiums, as well as interest paid by the insurance company. In fact, the whole life contract is designed for you to take advantage of that money because when you die, your beneficiaries receive the death benefit, but not the cash value that’s accumulated.
Whole life policies build up cash value slowly at first, but then pick up the pace after several years, when your earnings start to grow faster than your "mortality cost” (the cost of insuring you). At some point, the cash value may eventually earn enough that it could be used to continue to pay for your premiums until you die. Your insurer should be able to provide you with a policy illustration to demonstrate the potential growth of your policy.
Unlike whole life, which covers you until your death, term life insurance provides coverage for a specified period of time, such as 10, 15 or 20 years. For term policies, the premiums increase over time unless you buy a "level term" policy, guaranteeing that premiums stay the same.
There is no cash value component to a term policy. In the event that you could outlive the term of your policy, your policy expires. You would need to shop for another policy if you wish to still have coverage. Some companies allow you to convert your term policy into a whole policy.
With term insurance, you can get significantly higher coverage amounts for a much lower premium compared to permanent insurance. That’s because there’s a good change you outlive the term and get nothing for the premiums you’ve paid.