We all want to make savvy financial decisions that will ease the burden of monthly expenses and set us up for a comfortable retirement.
In the slew of financial decisions you face daily, you’ve likely heard the term whole life insurance before. This somewhat controversial topic has been in the reoccurring spotlight for years. Is it really a huge scam, or could it be the missing piece to your family’s security?
This article will illustrate some of the benefits of this type of policy and why it could be a wise investment for your family’s future.
But first, let’s review some basics of life insurance.
Life Insurance 101
In short, life insurance policies provide financial protection for your loved ones and dependents in case you die. There are two main categories for life insurance policies—term policies and permanent policies.
Term Life Insurance Policies
Term life insurance policies provide coverage for an established number of years, often in 10, 15, 20, and 30-year increments. Term policies offer a straightforward way to protect your family. You choose the amount of coverage and a term limit. If you die while your policy is in force, your beneficiaries receive a payout. Once the policy expires, you can apply for a new one.
Permanent Life Insurance Policies
As the name suggests, permanent life insurance policies don’t expire; they provide permanent coverage. There are also a few different types of permanent life policies, most fitting in either the universal life insurance or whole life insurance category.
Today, we’re going to narrow in on whole life insurance policies and why you should consider this type of coverage.
Benefits Of Whole Life Insurance
Whole life policies provide unique features that term policies do not.
1. Fixed Premiums Help You Plan Ahead
It’s common knowledge that getting life insurance in your 20s is a vastly different ballgame than signing up in your 50s. One of the most enticing things about whole life insurance is that your whole life insurance premium payments are set for the entire life of the policy.
While you should plan on paying more upfront for the same coverage that you would find in a term policy, the benefits begin to add up the older you get.
Having a set premium will let you take control of your life insurance costs and avoid increased life insurance rates later on.
2. Your Policy Won’t Expire
Let’s say you are a planner and make sure to do your due diligence to avoid surprises later, so you sign up for a 30-year term life insurance policy when you are 34. Because you planned ahead so far in advance and had a pretty awesome medical exam, your life insurance coverage fits easily into your budget. However, by the time that policy expires, you are now 64, and life insurance rates are not working in your favor. Not only will you experience a substantial premium increase because of your age, but you will likely also need another medical exam and go through the underwriting process all over again. Only this time, your body is also no longer what it once was.
Whole life policies prevent you from having to apply for a new policy when your budget, body, and health are more vulnerable.
3. You’ll Build Cash Value
One of the most unique features of a whole life policy is its ability to build cash value. Once you have reached your death benefit amount, part of your monthly premium is diverted into a separate account that accrues interest and builds wealth.
Your policy’s cash value compounds regularly and is tax-deferred, meaning you won’t pay taxes on the cash value growth each year. Some families find this a lucrative opportunity to grow their money and take advantage of potential tax-free policy loans or withdrawals.
Here are a few things to keep in mind about how this part of whole life insurance works:
- The way your policy is set up does matter. Your withdrawals may be subject to income tax if you trigger a taxable event like cashing out your policy entirely. (Your death benefit will always come as a tax-free lump sum.)
- This cash value account may have lower interest rates than other investment opportunities. However, it is guaranteed growth that is not subject to the whims of a market.
- If the policy owner passes with money left in the cash value account, the funds will go to the life insurance company, not the beneficiaries. (The death benefit will still be paid out.)
- If there are any unsettled policy loans that were not fully paid back at the time of the policyholder’s death, that amount will be deducted from the death benefit.
4. Your Policy Can Earn Dividends
Whole life policies are just one type of permanent life insurance that pays its policyholders dividends regularly. These dividends are based on several factors, including interest rates, investment returns, and the company’s overall success. You can use your dividends to purchase more insurance or apply it towards your premium. While you won’t see the same dividends for a $100,000 policy as you would for a $1 million policy, this added income stream could help offset some of the steep costs of a whole life policy.
5. It Provides Long-Term Coverage For Children
In the event a policyholder dies, a death benefit will be issued to the beneficiaries in the form of a lump sum. This is commonly used to cover final expenses like funeral arrangements. However, this death benefit is also available to help build financial strength for those left behind—specifically children and spouses. According to Annuity.org, 10% of people would feel the financial strain after the loss of a primary wage earner within one week, while 44% of respondents reported they would feel it within months.
If you expect to provide long-term care to anyone, a whole life insurance policy guarantees that they will always have what they need.
6. You Won’t Lose Coverage For Being Sick
Finally, if you find out you have cancer or another major illness while you have your whole life policy, you won’t lose coverage or experience a premium hike. This is especially helpful when combined with the fact that whole life policies won’t expire. For example, if you find out you have cancer while a term life policy is in effect, you will be covered. However, once that policy expires, you will likely have difficulty qualifying for another policy.
Choose The Best Life Insurance Policy
As much as we don’t like to think about it, life insurance is one type of insurance product everyone can benefit from. Luckily, plenty of life insurance options are available today to find the perfect coverage for your situation. Whole life policies provide some great additions to your financial planning, but these policies aren’t the best option for everyone. Therefore, be sure to get multiple life insurance quotes and ask plenty of questions during the application process.
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