Whole life insurance benefits is what you may be looking for if you want to purchase life insurance and never have to worry about increasing premiums.
Whole life insurance is a different coverage type than term life insurance, and has many built-in guarantees which you may find valuable. We have many options and different types of coverage to inform you of. Did you know you could buy life insurance while pregnant or life insurance with lupus? Keep reading to learn more about all of your options.
Guaranteed Level Death Benefit
If you are looking to purchase life insurance and you want a death benefit guaranteed for as long as you live, whole life insurance may be exactly what you are looking for.
Whole life has a guaranteed minimum level death benefit for as long as you live. In other words, it’s a permanent life insurance policy. The question, unlike term life insurance, is not if it will pay out, but when.
The life of the product on paper usually goes all the way up to age 121. While this might seem absurd, the population of persons over 100 years old is increasing every year, and at a very fast pace. What it boils down to in the end is you will expire before you life insurance policy does.
The main concern when considering a whole life insurance policy, though, is usually the premium.
Guaranteed Level Premium
Whole life insurance premiums have some advantages and disadvantages, depending on how you look at it.
The premiums for a whole life insurance contract are guaranteed to be level, and this is a huge advantage of this type of policy. You know what your premium is going to be right now, and you know what it’s going to be 50 years from now, should you live so long. It will not go up.
The disadvantage with the level premiums for this type of policy is the amount you’ll pay. Because the insurance company is allowing you to have a level payment, they are basically averaging your payment from the day you start to the day you are expected to die. What this means for you is drastically higher premiums.
In the long run, though, you might actually end up paying less. If you were to hold another type of increasing premium type of life insurance until you passed, eventually the premiums would be greater than that of your whole life policy, so keep this in mind when considering your purchase.
Within a whole life insurance policy, there is a cash growth element in addition to the death benefit.
For most carriers, when you purchase a whole life policy, the cash growth has a guaranteed minimum interest rate over the life of the contract. The most common interest rate is around 3-4%, but it can vary in both directions.
But, this does not mean every dollar you put in makes interest. The interest and growth component is only attributed to the non-expense portion of your premium payments.
For example, let’s say your premium was $100 in the first month. Your expenses for the policy and life insurance might be $60. In this case, only the remaining $40 would would be given consideration for interest.
Tax Deferred Growth
One of the great benefits to whole life insurance is the cash growth. But did you know it grows without any taxes?
Also known as tax deferred, the money inside of a whole life policy is able to grow without any taxes coming out every year, therefore awarding the policy with compound interest and allowing the policy to grow faster and faster. But with a life insurance policy, the dollars you pay with must be after-tax dollars.
Much like a 401(k) or other tax deferred plan, once the money is in the policy, the interest or earnings in a year is attributed not only to the premiums you’ve paid, but any other growth which has already been accounted for, too. But the money inside of a 401(k), for example, has not yet been taxed, and the tax treatment occurs on the back end.
The process of interest repeats the next year, and the next year, and so on, and the IRS does not subject any growth to taxation unless the policy becomes a modified endowment contract (MEC, for short), which we’ll discuss later.
All you need to focus on for right now in regards to a MEC is there is a established maximum amount of money which can be put into a policy, and it is based on how much death benefit the policy has as well.
Tax Free Death Benefit Proceeds
As with all life insurance policies, the death benefit proceeds are paid out to an individual or estate without the burden of taxes.
This comes in handy when trying to plan what the death benefit will be used for, and trying to allocate all the dollars to be used efficiently. If a policy is for $100,000, the death benefit will pay exactly that amount.
But with whole life insurance, there is a little more to it.
Because whole life insurance has the cash growth element as well, there may be other things to consider as well when paying out the claim, namely loans or surrenders. If any money has been taken out of the policy this reduces the amount of any payout by as much as was taken with the additional interest.
As the cash value grows, it also increases the face amount, or death benefit, of the policy with something called paid up additions. Now, not every policy has it, but straight whole life policies do if purchased by reputable companies.
So let’s take an example which takes both of these into account, starting with a death benefit of $100,000. After some time, there is $20,000 in cash value in the policy and the death benefit grows to $120,000 (for easy math, although it won’t necessarily be exact).
If you die before taking a loan, the death benefit payable to your beneficiaries is $120,000. If you take a loan of, let’s say, $10,000, your beneficiaries will receive the remainder available, $110,000.
Although it is over simplified, the methodology is correct when figuring the payout amount for a whole life insurance policy.
Penalty Free Access To Cash
Perhaps one of the greater advantages to the whole life policy is its access to cash.
Cash grows within a policy tax free, and, if it’s structured correctly, you have access to the cash value without taxes, and without penalties. Unlike a 401(k) which requires the 10% penalty for withdrawals before age 59 1/2, and taxes to be paid when the money is accessed, a whole life insurance policy does not have the same requirements.
One thing to keep in mind when accessing the cash value is the deficit it creates in the death benefit. Remember, if you access cash, the death benefit which is payable to your heirs is decreased by roughly the amount you withdraw.
Another thing to think about is interest. Although you do not need to pay back the loan within the policy, it does accrue interest which goes against the policy as long as long as the loan is not refunded. Some policies have low loan rates, but others are not competitive.
Other Things To Consider
There are other things to consider when looking to buy whole life insurance policy, namely the companies with which you choose to do business.
While searching for a whole life insurance policy, a reputable, financially strong and stable company is a must. While it’s always a concern, it’s much more crucial to buy a policy you’ll have forever, than a policy you might have for only 5 years. The claims paying ability backing your insurance policy lies on the shoulders of the issuing company.
Some companies also have dividends within their policies, which are attributed to the cash value of the insurance policy. This not only makes you more money, but can aid in increasing the death benefit as well. This can make a substantial amount of difference in the long run.
The availability of riders can also make a difference when choosing carriers or policy types. Some riders available for whole life insurance policies include waiver of premium, children’s insurance riders, and some hybrid type of policies even include a long term care aspect should you require it.
At the end of the day, the policy you choose still needs to match your goals and objectives. If you need a million dollars in insurance, for example, it may be cost prohibitive to own a million in coverage with just whole life. Purchase the amount of whole life insurance you’ll need in the long run, and supplement the rest with a term life insurance policy to save on premiums for the duration you’ll need.
And as always, consult an agent before making this purchase: it’s a pretty permanent one.