When you’re shopping for life insurance, you have a lot of choices. Whole life insurance can be an attractive option because it can build cash value and it never expires. If you’re considering buying a whole life policy, read this first. These are some fundamental things you should understand about whole life insurance before you buy.
1. There are two main types of life insurance: term and permanent.
Term Life Insurance
Both term and permanent insurance provide a death benefit—an amount that’s paid upon your death to the beneficiaries you name. The main difference is that a term life policy is issued for a set number of years (e.g., a 10-, 20-, or 30-year term), after which time it expires. People often use term policies as a way to protect their immediate families while they have children at home, providing a replacement for their income and other household contributions in the event of their untimely death. The benefit and premium amounts are set and do not change over the life of the policy, in most cases.
Permanent Life Insurance
Permanent life insurance, on the other hand, does not expire. It provides lifelong coverage, provided the premiums are paid as agreed. It also builds cash value, which you can access by making a withdrawal or taking out a loan from the policy. The cash value builds on a tax-deferred basis, making this an attractive option for people who may need access to these funds later in life, especially in the event of an emergency.
2. There are different ways you can pay your permanent life insurance premiums.
Whole life insurance policies offer a variety of ways to pay premiums. This includes a single-premium payment plan, which funds the policy with one lump-sum payment. A portion of this payment provides the cash value for the policy. Over time, this cash value grows at a fixed rate and is further increased using dividends, as they are declared. Alternatively, premiums can be paid over a set period of years, after which the policy simply continues to grow over the insured’s lifetime, or premiums can continue throughout life. This can be risky, since the policy may be surrendered in the event the policyholder can no longer pay the premiums. The earlier a policy is surrendered, the less cash value it will have. When you’re choosing how to pay your premiums, plan carefully to ensure you won’t lose your coverage.
3. It’s important to understand how a whole life policy’s cash value works.
Every whole life policy provides a minimum rate of growth on its cash value. In addition to this, some policies pay dividends, allowing for the possibility that the cash value will grow faster than predicted. You can use the dividends to purchase additional coverage which, in turn, increases the cash value of the policy, accelerating the growth. Dividends are not guaranteed, so if an insurance agent shows you growth projections for a policy you’re considering, be sure you understand what growth is guaranteed vs. what is based on dividend growth that is not guaranteed.
With whole life insurance, you have choices for using the policy’s cash value.
- You can borrow against the cash value. This can be an easy way to access needed cash because it doesn’t require you to go to a bank for approval. The insurance company charges interest on the loan, but any unpaid loans from your whole life policy will simply reduce the death benefit.
- You can use it to buy paid-up coverage in the event you can no longer afford to pay the policy’s premiums.
- You can surrender the policy for cash. In this case, the death benefit disappears. Depending on how long the policy has been in effect, it may also be subject to surrender fees. The cash you receive from surrender is also subject to income tax.
4. A variety of riders may be available.
For an additional cost, you can choose from a variety of riders to supplement the protection provided by your whole life insurance policy. Examples include the following:
- An accelerated death benefit gives you access to a portion of the death benefit in the event that you’re diagnosed with a chronic or terminal illness or other specified medical condition.
- Waiver of premium suspends your premium obligations in the event that you become disabled.
- Paid-up additions allow you to purchase additional coverage with a single premium. This additional coverage will remain in effect even if you surrender the original whole life policy.
Rider availability is dependent on the company the policy is purchased from and most riders often have specific age and coverage limitations.
5. It’s important to understand your needs before buying.
Before you make a final decision, be sure that you’ve looked at the range of financial services products that are available to determine which is the best fit for your needs. A financial advisor can be a valuable resource in this process. Also consider what amount of death benefit is necessary to take care of your loved one’s needs and how these needs are likely to change over time. This can help you decide between term and permanent life insurance and guide your decisions about managing a whole life policy if you choose one.
ELCO Mutual offers a range of whole life insurance policies to suit a variety of needs. For regular updates with valuable information about life insurance and annuities, subscribe to our blog.