Why Choose Whole Life Insurance?
Life Insurance contracts helped millions of people in securing final expenses such as funeral costs, mortgage payments, and consumer debt payments for the policyholder and their dependants. Original life insurance contracts were time sensitive, meaning that active coverage only lasted a set period of time. If the policyholder outlived the length of the term life insurance contract, no payments would be made upon the insured’s passing. To address consumer complaints of insurance that will pay regardless of time, Whole life insurance policies were created. Whole life insurance policies remain active until the beneficiary’s passing, if the premium payments are made. Whole life insurance contracts have a 100% guarantee of payout upon death, versus 2-3% on Term (temporary) life contracts.
Whole Life Insurance: Cash Value
Whole life insurance contracts have a unique “cash value” provision. This provision allows a cash reserve to build up against the overall death benefit. Any interest that accumulates on a Whole life contract is credited to the cash value allowance. The cash value equals the amount of the death benefit upon maturity of the policy. Most Whole life contracts reach full maturity when the policyholder reaches age 95 or 100. If the beneficiary wants to borrow any of the cash value, the death benefit is forfeited and the cash value amount is paid back with interest minus any dividends paid out. The recommended method for accessing wealth is to borrow against the cash value.
Downfalls of Whole Life Insurance Plans
The biggest drawback to whole life insurance policies are increased premium payments than can be found in Term life contracts, primarily in the early stages of the policy. On the other hand, while Term contracts gradually increase during the duration of the policy, Whole life policy premiums remain generally fixed until the insured passes away. Additionally, there may be other ways to save money instead of the return rate in the policy. Beneficiaries can increase the death benefit by adding “riders” to their contract. Riders, which will increase premium rates, are optional amendments to existing policies.
There are multiple types of Whole life insurance policies available. Popular types of whole life insurance include “guaranteed” insurance, which pays benefits up to a fixed amount. “Express” insurance options allow for family members to receive benefits to be used for funeral costs and covering existing debts owed. A generally smaller benefit than guaranteed insurance, express insurance has a smaller premium amount and provides assurance final costs are covered as long as premium payments are made. The variations result in different premium payment amounts and the potential amounts available for cash value. For example, with a participating (par) policy, the insured shares dividends with the insurance company. These dividends are also known as refunds, as the dividend is considered an overcharge of premium payments.
When he’s not trying to convince his friends to buy the latest hot stocks, Frank Harrington writes for InsuranceComparison.net. As a former insurance professional, he brings his expertise on all kinds of insurance topics: health, cars, term vs whole life insurance.