What is Whole life insurance?
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Whole (total) life insurance is a type of permanent life insurance policy. As the name suggests, a whole life policy provides coverage for your entire life. Although the policy may lapse if you fail to pay premiums, it will not expire the way a term policy eventually will. Whole life policies also have a cash value component that term policies do not.
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To help you decide if this type of total life insurance is right for you, we at the Market watch. Home Team have compiled everything you need to know about whole life insurance policies in this guide.
What Is a Total (Whole) Life Insurance Policy and How Does It Work?
Like other types of life insurance, total life insurance is a contract between the policyholder and an insurance company. Typically, the policy owner is the person the policy insures, though exceptions do exist. As long as the policyholder pays the required premiums, the policy’s beneficiary will receive a payout when the insured passes away.
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With a total life policy, a portion of each premium payment is deposited into a separate account that the insurance company controls. This fund becomes the policy’s cash value and functions as a tax-deferred savings or investment account. Over time, as the investments made by the insurance company pay off and more premium payments are made, and the cash value will grow.
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A policyholder can benefit from this policy cash value during their lifetime. Once the balance exceeds a certain threshold, which may take 10,20 years or longer, the policy owner can access it in one of the following four ways:
Making a withdrawal: The policyholder can withdraw a portion of the money value outright. However, the amount withdrawn will be deducted from the death benefit in policy.
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Taking out a loan: The policyholder can borrow against the money value and pay back the loan with interest. If the loan is not fully repaid before the insured’s death, the insurance company will deduct the remaining balance from the death benefit.
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Paying the premiums: The policyholder can use the money value to pay the whole life policy’s premiums. This could reduce or eliminate the out-of-pocket cost of maintaining the policy.
Surrendering the policy: The policyholder can choose to surrender the policy in exchange for a cash payout. The cash surrender value will increase as the policy ages.
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A whole life insurance policy may have one or more beneficiaries. Most policyholders typically name their spouses or children as their beneficiaries. However, the beneficiary can be any person or organisation, including a business partner, a trust or a charity.
Who Needs Whole Life Insurance?
Whole life insurance can benefit nearly anyone whose death would financially impact another individual or organisation. It can be an especially wise investment if any of the following scenarios apply to the policyholder:
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You have dependants who will always require financial assistance.
You want to focus on estate planning as you grow older.
You would like to minimise the tax burden on your heirs.
You plan to leave a legacy donation for your favourite nonprofit.
You believe you will have use for the cash value in a decade or so.
Your death at any age will negatively impact your business(small or large).
You have an elevated risk of developing certain medical conditions.
Whole Life Insurance vs. Term Life Insurance
Whole life and term life are the two policy types most people consider when shopping for life insurance. Both options typically feature level premiums and a guaranteed payout amount, though the amounts of each will vary. These two types of life insurance differ in four key ways:
Cash value:
Term life insurance policies only have a face value, which is the death benefit. Whole life insurance policies have both a face amount and a cash value. Thanks to the cash value, a whole life insurance policy can double as a savings or investment tool that can benefit the insured during their lifetime.
Policy length:
Term life insurance provides coverage during a limited time period, known as the term. Term policies typically run between 10 and 30 years, although some insurers offer 40-year terms, according to the Insurance Information Institute (Triple-I). Regardless, this type of insurance will eventually expire. Whole life insurance, however, covers the insured for her entire lifetime.
Premiums:
Whole life insurance costs significantly more than term life insurance because of the difference in cash value and policy length. Lifelong coverage is safer for the insured but riskier for the insurer. The higher premiums reflect that risk, the associated costs and the addition of a cash value component.
Death benefit:
Most policies of either type feature a level death benefit. However, some insurance companies offer a second option for term policies. With decreasing term life insurance, the premiums remain the same throughout the policy’s life, but the death benefit decreases over time. This option is not available with whole life policies.
For many people, the cost is the deciding factor. Although a permanent policy, such as whole life insurance, offers more benefits, term life insurance is always more affordable.
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One possible solution is to purchase a convertible insurance policy. This type of policy begins as term life insurance, which means lower premiums. You can then upgrade to total life insurance, typically at any time you choose, without undergoing another medical examination.
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