Whole Life Insurance Policies: Description, Pros And Cons
In order to satisfy market demands and policy holder concerns, whole life insurance policies were created as an alternative to the original Temporary or term life insurance policies. The biggest advantage to whole life insurance policies is that the plan remains active for the life of the policy holder, as long as yearly premium payments are made. Term life insurance policies have a set time limit for active coverage. This time is usually somewhere between 15 up to 30 years. If the policy holder outlives the coverage of the term policy, no benefits are paid upon death. Most term life insurance contracts are only paid out around 2 or 3 percent of the time, whereas whole life insurance contracts guarantee a payout upon the policy holder’s passing.
Benefits of Whole Life Insurance Policies
One of the biggest benefits of a whole life insurance contract is what is referred to as a “cash value”, which works as a reserve for the cash that will build up along with the death benefit. Whole life policies also credit any interest to the cash value of the account. This cash value is equal to the death benefit when the policy matures. Most Whole life contracts mature when the policy holder reaches the either 95 years old or 100 years old. If the insured wants to borrow from the cash value, the death benefit would be forfeited and the cash value is paid with interest not including any dividends paid. Borrowing against the cash value becomes the most economical method of accessing one’s wealth.
Another benefit of a whole life policy is that once a person buys a whole life insurance policy, the premiums will be set at that particular rate for the life of the policy. If the policy is purchased when you are younger, the premiums will be lower.
Disadvantages of Whole Life Insurance Policies
The biggest disadvantage to whole life insurance policies are higher premium payments than term life insurance policies, especially in the initial stages of the policy. However, while term contracts progressively increase during the time frame of the policy, whole life policy premiums remain mostly unchanged until the policy holder dies. Also, the internal rate of return of the policy may not be economical versus other savings options. Policy holders can increase the death benefit by purchasing amendments to the contract called riders. Riders will result in paying a higher premium.
There are multiple forms of whole life insurance policies available for interested policy holders. 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 to be an overcharge of premium payments.
Frank Harrington usually spends his free time on stock tips, but he can usually be found over on InsuranceComparison.net. Having worked in the insurance industry for years, he thought he’d try being a freelance writer instead for a change. His latest masterpiece is on whole life insurance.