What is whole life insurance?
Whole life insurance is a permanent life insurance policy that provides insurance protection for an individual's lifetime. There are two types of life insurance policies: term insurance, which is temporary, and permanent insurance, which lasts the insured's lifetime. Term policies only pay a death benefit if the insured dies during the term period. As a result, whole life insurance policies are more expensive than term policies.
Whole life insurance policies also have a cash value component. The premiums you pay for a permanent policy cover the cost of the life insurance policy and build a cash value (savings fund) within the policy. The cash value amount depends on the premium paid, the duration of the policy, and the interest rate the policy earns. The cash surrender value is different from the death benefit. Term life insurance policies do not offer a cash value.
Advantages of whole life insurance
Whole life insurance offers several advantages. Unlike most financial products, whole life insurance gives certain guarantees for the insured and the beneficiaries.
Guaranteed coverage
A whole life policy never expires as long as you continue to pay the premiums. Even if your health declines, you are guaranteed to be covered regardless of when you pass away. For retirement planning, this means you are guaranteed to have life insurance in your senior years, at a fixed cost.
Guaranteed level premium
Your premiums will stay the same throughout the life of the policy. It will never go up. This makes the premium more affordable over the long run. Other types of policies may adjust their premiums over time, as the policyholder ages or as their health declines.
Guaranteed death benefit
As long as you don't have any loans against your life insurance policy, the death benefit amount (the amount paid to your beneficiaries) is guaranteed never to decrease. You can have peace of mind knowing there is a guaranteed amount of money that will go to your beneficiaries or causes you care about.
Guaranteed cash value
Whole life insurance policies have a cash value that is guaranteed to grow at a set rate each year. This amount depends on the policy you get and the insurer the policy is through. Unlike the stock market, which can be volatile, the cash value of a whole life policy will grow every year without fluctuating.
Potential dividends
In addition to the cash value growth, many life insurance companies also pay out a dividend. You can take the dividend as cash, use it to pay the premium, or reinvest it into your policy. While the dividends are not guaranteed, these payments are a way mutual insurance companies share profits with policyholders.
Tax benefits
There are several tax benefits of whole life insurance policies. The death benefit is tax-free for your beneficiaries. The cash value growth and the dividends you may receive are also tax-deferred. This means the cash component of your whole life policy grows tax-free. You will only have to pay the taxes on the gains if you surrender your policy and take out the cash. In addition, you can borrow against your cash value without paying taxes on it as long as you repay the loan.
Life insurance riders
Some policies allow you to add a rider or an endorsement to your policy. One popular rider is a long-term care or living benefit rider. This rider allows you to use your death benefit for long-term care needs. What you don't use will go to your beneficiaries as the death benefit.
Another popular rider is a waiver of premium benefit. This rider waives the premium payment if you are unable to make payments due to a qualifying event. The rider guarantees that your policy will remain in effect even if you don't pay the premiums.
How much does whole life insurance cost?
One of the disadvantages of whole life insurance is its cost. It is expensive compared to a term life insurance policy. You can buy a term policy with a much larger death benefit for the same cost as a whole life insurance policy. 60% of new individual policies are permanent life policies, but they only represent 28% of the total face amount of all new policies.
The average cost of a 10-year term $250,000 life insurance policy is typically between $15 and $17 per month for a healthy 40-year-old male. Life insurance typically costs more for males due to their shorter lifespan and the fact that they are more likely to have dangerous jobs or lifestyles.
A $250,000 whole life policy in comparison for a healthy 40-year-old male is $327.99 a month, over 20 times more than the cost of a 10-year term policy for the same benefit amount. This is why some financial experts say it may be better for some people to buy term life insurance and invest the difference in cost.
Who is whole life insurance for?
While whole life insurance is not for everyone, there are several instances where whole life insurance makes sense. Whole life may be best for those who need money to pay for estate taxes, want guaranteed protection, and/or own a business.
Health issues
If your family has a history of health problems and you believe you may not qualify for a life insurance policy later on in your life, then a whole life policy may be right for you. It can provide peace of mind in case you can't qualify for life insurance as you get older.
High net worth
Individuals with a high net worth can use whole life insurance policies as part of their overall financial plan to defer taxes. The cash value grows tax-free and they are able to borrow against the policy's value without having to pay taxes as long as they pay it back.
Paying estate taxes
The estate tax exemption is $12.06 million in 2022. If your net worth is more than that, then purchasing a whole life insurance policy may make sense to help your beneficiaries pay estate taxes.
Special needs
For special needs children, a whole life insurance policy can provide the guaranteed funds to help take care of them.
Business agreements
Life insurance can be used for business partners. The death benefit can be used to purchase each other's shares in the business after one of the partners passes away. This is known as a buy-sell agreement.
Savings vehicle
A whole life insurance policy isn't the ideal way to invest and save money. But if you have trouble saving money, then the cash value component can be a useful savings tool. Part of the premiums are used to fund your cash value. Keep in mind that most policies have a minimum number of years you have to keep the policy before you can access your cash value.
Guaranteed death benefit
A term policy ends after a set term limit. The longest term is typically 30 years, meaning the policy will expire after that. If you want another life insurance policy, you will have to submit a new application. Life insurance costs go up significantly for older people. So if you want your beneficiaries to get a guaranteed death benefit without worrying about reapplying for life insurance, then whole life may be a better bet.
How to select the right whole life insurance company
There are quite a few companies that offer whole life insurance. Your goal should be to find the life insurance company that offers the best coverage and terms for you at the right cost. Each company has its pros and cons, so here are the things to consider when choosing one.
Insurer's financial strength
The guarantee that an insurer offers is only as good as its ability to pay. A whole life insurance policy is for the long haul, so you want it to be around to pay the death benefit. AM Best is a well-known insurance rating agency that rates companies on a scale of A++ (Superior) to D (Poor). The ratings are based on an insurer's ability to pay claims, debts, and other financial obligations.
Look for an insurer with at least an A- (Excellent) rating. The higher the rating, the higher the ability to meet its financial obligations and pay its claims.
Insurer's complaint record
The National Association of Insurance Commissioners (NAIC) provides information for insurance commissioners to effectively regulate the industry and protect consumers. They publish a complaint index that tells you the insurance companies share of complaints based on its size.
After searching for the insurance company, select "click for report options" and then select "complaint trend." The national complaint index is 1. This means a company with a complaint index of 2 has twice as many complaints as expected in the market. The closer to 0, the better the complaint index of the insurance company.
How to qualify
There are different types of whole life insurance policies. Find the coverage and terms that best fit your needs. Not all insurers will offer a policy that is a fit for you. It's best to check how difficult it is to apply for coverage and what the insurer requires from an applicant. Some will require full medical testing, while others may offer a life insurance policy with no exam, and only require completion of a detailed medical questionnaire.
Customer service
How does the company treat customers? Do they get back to them promptly? How easy is it to access the cash value? Some insurers have agents while you can apply for some policies online. You will want to ensure that the company is easy to work with.
J.D. Power examines customer satisfaction and publishes the U.S. Individual Life Insurance Study every year. The study measures the experiences of customers of the largest individual life insurance companies in the United States. The score is out of 1000 and the higher the score, the higher the overall satisfaction index ranking.
Compare insurance companies
The rates and coverage terms will vary based on the insurer. Some insurers may be more competitive in certain areas than others. Get quotes and policy terms from different companies, and compare them to make sure you find the best value.
