What is whole life insurance?
Whole life insurance is also sometimes referred to as ordinary life. It is a life insurance policy that is guaranteed to remain in force for the insured’s whole life.
It does not matter where you purchase it, or what company you purchase it from. Whole life insurance is basically the same type of policy as it has been for over 100 years. The primary difference will be what each particular company charges you in premium.
Whole life insurance premiums are fixed at the age of issue. Typically, premiums do not change over the insured’s lifetime.
Unlike term life insurance, whole life insurance also offers a cash value component.
Cash values on traditional whole life insurance policies will earn a minimum guaranteed interest rate. These cash values will accumulate on a tax-deferred basis.
Mutual life companies offer participating whole life policies. These companies typically pay a dividend to the policy owners of their whole life policies.
The dividend can be taken in cash, applied to the cash value, used to lower the premium, or to purchase additional death benefit. Dividends are treated as a return of premium so therefore are not usually taxable to the insured. Dividends are not guaranteed.
Term Life Insurance versus Whole Life Insurance
Which type of coverage is best? This is seems to be a never ending debate depending on who you talk to. The truth is both term life and whole life insurance can both be used to cover different needs.
Typically, term life insurance is used for a temporary need of protection. This can be anywhere from 5 to 20 years. Term coverage will be much less in premium initially if just comparing death benefit protection.
But, whole life insurance should be considered if:
- You want to guarantee some of coverage is always going to be in force no matter how long you live
- Their is a family history of longevity
- Their is a family history of medical conditions such as diabetes, heart disease or cancer.
- Their is a need to grow cash values on a tax-deferred basis for retirement, college planning, etc.
- Their is a need to leave an estate or to have cash available for estate taxes
- Their is a need to leave a charitable donation
- Their is a need for a grandparent to leave something for grandchildren
Term life insurance simply cannot guarantee that coverage will be there when you need it. At some point the term will expire or become too expensive to continue.
Only whole life insurance that continues for life can guarantee that tax-free money will be passed on. It is important to remember that life insurance proceeds payable to someone other than the deceased estate are not part of probate. This keeps an insured’s wishes private and out of public record.
Advantages of whole life insurance
- A level known premium for life of the policy
- Guaranteed floor on the interest credited to the cash value
- Cash values accumulate tax-free
- Cash values are not subject to market risk
- Policyholders can borrow against cash value at a low net cost
- Life insurance proceeds are not part of the probate process, unless estate is named beneficiary
Disadvantages of whole life insurance
- Partial withdrawals or full surrender of cash values are subject to ordinary income tax
- Typically cash value is low during early years of contract
- Surrender of the policy during first 10 years often results in surrender penalty
- Policy loans are not tax-deductible
- Cash values accumulation is subject to inflation
- Premiums will be initially higher when compared to term insurance(however, later as term premiums rise the whole premiums remain level)
Case study of whole life insurance needs
Here is a typical situation where whole insurance might be appropriate:
Bill and Susan are a young couple in their mid 30’s. They have two young children. Bill is the primary breadwinner while Susan is a stay at home mom.
After completing a needs analysis, Bill and Susan determine a need of $1,000,000 of protection for Bill and $100,000 for Susan.
Bill would like a level term life policy for 30 years. He figures this will get the kid’s out of college, the mortgage paid off and him close to retirement.
Susan agrees with Bill, but also likes the idea of having some coverage longer than 30 years. She is worried about having no coverage if they are both alive at the end of 30 years.
Susan likes the thought of having some guaranteed insurance money to pay final expenses, leave some money to their charity and plan for their future grand-kids. She also wants to have easy access to cash value for possible college costs.
She understands that term insurance can’t offer these guarantees.
After careful consideration, Bill and Susan decide to purchase three different policies to satisfy their needs. They purchase a $750,000 30 year term plan and a $250,000 whole life plan for Bill. They also decide on a $100,000 whole life policy for Susan.
These plans will provide them with maximum insurance protection during the early years, along with permanent protection for the later years.
Once the 30 year term policy ends the whole life insurance will continue for the remainder of their lives.
How to evaluate whole life insurance needs
The best way to evaluate your needs for whole life insurance or any insurance needs is to speak with an independent agent.
An independent agent with many years of experience will be able to sift thru the numerous whole life insurance plans available and design a plan that is just right for you and your family.
If you would like to speak with an expert in the marketplace, please contact us at 1-888-393-9003 or mike@specialriskterm.com
