What is Whole Life Insurance
Most people are nowadays aware that they need some life insurance to protect your family when you are no longer there to take care of them financially. However, with the different types of policies available and the precise terms, you may be confused as to what kind of plan you should opt. If you consider whole life insurance, then you may have some questions. You may want to know whether whole life insurance is a good idea and whether it is better than term life insurance. You may want to know whether whole life insurance is a good investment and whether it is worth it.
What essentially is whole life insurance?
Similar to all life insurance policies, the main reason for you to buy a whole life insurance policy is to provide financial protection to your family or any other individuals or organizations in the event of your death. In essence, whole life insurance is like permanent life insurance and is also known as cash value life insurance. This is one of the two categories of insurance, along with the other primary type is term life insurance. The main difference between these two categories is that term life insurance ends after a certain number of years and the only benefit it offers is a payout of the decided amount in the event of the death of insured. On the other hand, permanent policies like whole life insurance also provide an extra savings component which is also known as the cash value of the policy plan. This is the reason that whole life insurance has higher premiums.
How the life insurance part of the policy work
• The death benefit is the tax-free amount of cash paid to your beneficiaries by the insurance company in case of your death.
• The beneficiaries are the person or people who receive the death benefit. These beneficiaries can be your spouse, children, a trust, a friend, a business partner, a non-profit organization, or other legal relationships and organizations.
• You pay towards the policy in the form of premiums, and the payment is either monthly or yearly
Whole life insurance lasts your entire life span as long as you keep paying the premiums. This means that if you buy the policy when you are 30 years of age, and you keep paying the premiums till the time of your death at the age of 80, then your beneficiaries will get the death benefit.
How the cash benefit part of the policy works
With a whole life insurance policy when you pay the premium, a certain percentage goes towards a tax-deferred savings component which is also called the cash value of the plan. This cash value of the policy earns interest and grows over a period of time, a system that most of us know as an increasing benefit. This rate of growth is lower compared to many other investment products. This is because insurance companies have to spend extra on things like policy administration expenses, underwriting costs and death benefit payouts. A company that manages assets does not incur these expenses and hence can afford to provide more benefit on investment.
There are some whole life policies which guarantee a particular amount of growth every year, which is difficult to find in other investments. This is the reason that after the recession, whole life insurance policies like these became popular.
Some people get confused regarding the way they can access the cash value of the policy. Let us take a look at the different forms and their pros and cons.
• There is no tax payable on the money that you withdraw from the cash value of the policy. However, you will have to pay fee if you entirely surrender your plan or your policy lapses.
• You can opt for a low-interest loan against your policy, and in this situation, there will be an interest payable on it just like any other loan. If you die before you pay back your cash value loan, then the remaining amount will be deducted from the death benefit.
• You will get the cash value if you surrender the policy. Here you need to bear in mind that usually, the growth of your cash value occurs when you have held the plan for two or three decades. If you surrender your policy within the first decade then most probably you will get the amount that you have paid as premium. Some insurance companies also charge a surrender fee, so you need to check these things before you surrender your policy.
This information is enough to understand what you can expect from a whole life insurance policy and will help you to make a decision.