What Is Whole Life Insurance?
For those who would like to benefit from a life insurance scheme besides being protected, whole life insurance or coverage may be a good option to choose. This permanent life insurance type is also known as whole life assurance and it is a policy that is valid during the whole life of the insured, by which time yearly premiums need to be paid.
But what exactly does the term refer to?
Whole life coverage means a complex life insurance scheme with two defining features: the insurance and the investment component. The first component provides the policyholder with insurance coverage, while the savings component gives him/her the opportunity to make good investments.
The first element refers to a certain amount of death-benefit given to the beneficiary if the insured dies, while the second helps the insured to accumulate money to his/her savings account attached to the life insurance scheme. This account may be used by the insured later in order to make withdrawals or lend money.
In order for whole life coverage to be valid, the owner of the policy must make regular premium payments - to pay for the costs of such an insurance contract. However, besides the coverage, these premiums also help one to increase one’s equity and create a beneficial savings account. The main advantage of this account is that both dividends and the interests that enter into this account are tax-deferred.
One should know that compared to the traditional term insurance policies, whole life insurance schemes have a higher level premium to be paid into the contract. But due to this disadvantage, the whole life coverage has the additional feature of the so-called ‘cash value’. There is a guarantee of a death benefit and a cash value, so the owner of the policy is assured. The insurance company is also benefited due to the decrease of the net risks associated with the death benefit with every premium payment made by the insured person.
Talking about the whole life coverage types, one can think about the participating, the non-participating, the economic, the indeterminate premium, the limited pay, as well as the single premium category. There is also a very new whole life coverage-type called ‘interest-sensitive whole life. One should be careful to choose the best available offer and that insurance type that best fits one’s needs. Being careful with the different companies is essential as not all of them offer all types.
For instance, the participating policy’s internal rate-of-return is generally much better than that of the universal life or the interest-sensitive whole life, whose cash values are invested into the money market as well as into bonds. Participating whole life’s cash values, on the other hand, are invested into the life insurance company, which can be either in real estate or in the stock market. However, variable universal life insurance can outperform whole life coverage.
Next, what about the whole life coverage’s requirements? This policy type typically requires the policyholder to pay premiums for the entire life of the insurance scheme. There are some exceptions that allow the policy to be ‘paid up’ in as few as 5-6 years or by a single large premium; however, this is not the general situation. For those who would like more flexibility in this sense, universal life insurance is probably a better choice.
Talking about the guarantees, it is generally true that the insurance company guarantees that the contract’s cash values increase no matter how the company performs and no matter how many death claims will occur. However, this is not the case with universal life insurance that may increase the policy’s costs and may decrease its cash value.
Finally, the coverage’s liquidity features are thought to be quite flexible: the policy’s cash values are liquid enough to be used for investment purposes, but only in case, the policy-owner can continue paying premiums. Another benefit is accessing the cash-value tax-free until one reaches the point of the total premiums that were paid. There is the chance of accessing the rest tax-free by taking out a policy loan. However, if the policy expires, taxes will be due on the outstanding loan balance. In case the insured person dies, the death benefit given to the beneficiary will be reduced with any outstanding balance of such a policy loan.