What is Whole Life Insurance?
Whole life insurance is a type of life insurance contract that provides coverage for your entire life. It provides a way to invest in your life, with guaranteed protection for your loved ones. It also builds guaranteed cash value which you can withdraw to help pay for college, purchase a home, cover unforeseen emergencies, or even fund your retirement. Here is a brief overview of the features of Whole Life insurance:
Benefits of Whole Life Insurance
It provides a guaranteed, income tax free, death benefit to your beneficiaries
Maintains fixed premium payments which are guaranteed to never increase
A portion of each premium payment is used to cover the cost of insuring you and the rest is funneled into a savings component known as “cash value”
The cash value has a guaranteed minimum rate of interest stated in the contract – usually around 4%
The cash value can be borrowed against or withdrawn anytime during your lifetime allowing it to serve as a better emergency fund compared to savings accounts and CDs
Unlike savings accounts and CDs the earnings in the cash value are not taxable
Unlike checking accounts, savings accounts, CDs, and Brokerage accounts, the cash value in a whole life insurance policy is not counted against you or your child for financial aid purposes
You can make tax free withdrawals from the cash value up to what you paid in premiums
In addition to earning interest on the cash value, some whole life insurance contracts pay dividends. Dividends are tax free when paid from a whole life insurance contract since the IRS considers them a return of your premium
The contract can never be revoked by the insurance company – unless you fail to make your premium payments on time or commit fraud
Should you decide you no longer want to make premium payments, whole life provides some flexible options:
You can request that the current cash value in the policy be used to purchase a reduced amount of permanent insurance; or
You can simply exchange the policy with the insurance company for all its cash value; or 3) You can convert the policy into a guaranteed monthly payment stream for life – similar to a pension.
Whole Life Insurance vs. Term Life Insurance
Just like term life insurance, beneficiaries exist in a whole life insurance policy. They receive the death benefit upon the contract holder’s death. The biggest difference is cost. In some cases, whole life insurance premiums are 5 to 10 times as much as term life premiums. This is because term life insurance does not contain any cash value or savings component. In addition, term life insurance only lasts a specified “term”, usually 5, 10, 15, 20, 25, or 30 years, before the policy expires. Therefore, if you don’t pass away within the specified term you lose all the money you paid into a term life insurance policy. In spite of the fact that term life insurance is cheaper than whole life insurance you are almost certain to lose 100% of what you paid into a term policy. Since whole life insurance covers you for your entire life you can never outlive the coverage – thereby guaranteeing a positive return on investment.
Whole Life Insurance vs. Guaranteed Universal Life Insurance (GUL)
Whole Life policies have a “cash value” component that is built into the coverage, while Guaranteed Universal Life policies usually do not. This makes Whole Life more expensive than Guaranteed Universal Life. However, as your learned from reading above, there are many tax advantages to building cash value in a Whole Life insurance contract as opposed to a savings or brokerage account. A simple way to understand a GUL is to think of it as a term policy which never expires. A GUL policy is purely an insurance product that only pays out in the case of death. This is very similar to traditional types of insurance that you are familiar with – think homeowners or auto insurance. The payoff from homeowners/auto insurance also requires a triggering event to receive a payoff (damage/theft/etc.). Prior to the triggering event, there is no benefit to you for having the insurance. This is why consumers purchase a Whole Life insurance policy as it provides for some benefits that can be accessed while they are alive. GUL and Whole Life Insurance are alike with regards to two factors: Both offer guaranteed death benefits and a guaranteed level premium (premiums stay the same the entire length of both policy types).