A Whole life insurance policy is a permanent life insurance policy and it provides coverage that will last your entire life as long as you pay your monthly premiums. With the life insurance premiums being the same for life, the death benefit is guaranteed, and the cash value grows at a guaranteed rate. You are paying for the death benefit but in addition to that you can save and those savings may accumulate into cash value.
Whole Life Insurance Breakdown
Whole life insurance guarantees payment of a death benefit to beneficiaries as long as you pay for monthly premiums. As already said, the policy includes a savings portion or cash value, alongside the death benefit. This may accumulate on a tax-deferred basis, so growing cash value is a crucial component of whole life insurance.
To build cash value, policyholders may pay more than expected premiums. Those payments are called a co-payment or PUA. The cash value provides the policyholder with a livelihood benefit. To gain access to cash reserves, policyholders require cash withdrawals or loans. In addition, owners can withdraw funds tax-free up to the number of premiums paid. Unpaid loans will be the death benefit minus the outstanding amount.
In other words, this is dividend crediting, which means that policies pay out a dividend, and you as a policyholder can choose how you want to receive it. If you use the dividend payments as credit for your premiums it reduces your pocket costs on annual basis.
Among the other benefit theory is also a benefit of choosing beneficiaries and you can split the cash payout among the beneficiaries how you like. This means it doesn’t have to be divided equally among them.
Policy costs
A whole life insurance policy may cost you approximately $4330 in a given year. The following factors are crucial to determine your monthly premiums:
- Age
- Gender
- Health conditions (weight primary)
- Your family’s health condition history
- Tobacco usage (or smoking habit)
- Criminal history
- Dangerous hobbies (adrenaline sports like parachute jumping, bungee jumping, etc.)
- Driving record
Cash Value Explained
You can mine cash value by withdrawing or taking out a loan, or by returning your policy. When you take out a loan, it’s tax-free and you can pay it back with interest, but with one rule: as long as you spend less than the cash value portion of the award you’ve paid, you don’t have to pay tax. If your expenses are larger, you will have to pay tax on the difference as it is an investment gain.
In the case of your death, both outstanding loans and early withdrawals will lower the final amount that will be given to your named beneficiaries.
Types of Whole Life Insurance Policies
There are several different types of life insurance policies and each policy provides different kinds of benefits, Which one should you choose depends on individual needs.
Final Expense Insurance
One of the most popular kinds of whole life insurance is called final expense insurance. Also known as burial insurance or funeral insurance, final expense plans are specifically designed to help cover end-of-life expenses like medical bills and burial costs.
Typical Whole Life insurance Policy
A typical Whole Life Insurance Policy accumulates cash value and it stays active until your life is over as long as you pay your monthly premiums. Premiums stay the same as long as the policy lasts.
Limited Payment Policy
With this type of policy, you will make premium payments for a specified number of years and pay for the policy upfront. With this, you will not need to pay premiums for the rest of your life because you will frontload them and have a premium-free policy for the rest of the upcoming years.
Single Premium
To purchase a single-premium policy, you will need to pay a sum of money in exchange for a death benefit. For instance, you could pay $30,000 for a $60,000 death benefit. If you pay more, your death benefit will be higher and if you pay less it would be lower.
Modified Premium
Modified premium life insurance policies allow you to pay lower premiums for the first 5 to 10 years. After that time expires, premium rates will rise. This can be good for someone who wants to buy a policy with a high death benefit and wants a better benefit in the future.
Survivorship
This type of policy may be ideal for married couples because insures both spouses and doesn’t pay the death benefit until both of them pass. If they are parents to a child with special needs and are worrying about who will take care of their child after they pass this policy may be a good option because a child could use those funds if death happens. This also could be used for parents who have adult children and want to provide them with a better financial situation after they are gone.
Universal Life
A universal life insurance policy is a type of whole life insurance that has flexible premium payments and those payments are based on the cost of insurance, which includes administrative fees, mortality charges, and other charges. The insurance costs depend on your age and health. This means that as you are getting older your premium costs will rise.
Variable Universal Life
This policy, instead of a guaranteed cash value, t uses the cash value portion of the premium and invests it in the market. That means the cash value can increase when the investments go up or decrease if they don’t.
Participating or Non-Participating
Whole life insurance policies are either participating or non-participating. If your policy is participating, that means when the insurance company gets earnings, they pay you as dividends and with non-participating, it doesn’t pay for dividends.
Term life insurance vs. Whole life insurance
Term life insurance occurs over a predetermined period of time, typically between 10 and 30 years. Term policies may be renewed after they end, with premiums recalculated according to the holder’s age, life expectancy, and health. By contrast, whole life insurance covers the entire life of the holder. Unlike a term life policy, whole life insurance includes a savings component, where the cash value of the contract accumulates for the holder. Here, the holder can withdraw or borrow against the savings portion of their policy, where it can serve as a source of equity.