For many years, the only type of life insurance that could be purchased was term life insurance. But then actuaries came up with the idea of whole life insurance. Also known as cash value or permanent insurance, whole life differs from term insurance because it was designed to cover policyholders throughout their entire life, not just a temporary span of time.
Today, more than 70 percent of the insurance policies that are sold are cash value policies. It is important to note, however, that whole life coverage is not the right choice for everyone. As with any type of insurance, these policies have their pros and cons and should be carefully evaluated prior to purchase. The following guide will help you get a clearer view of what you can expect to gain (or lose) by choosing whole life over another coverage option.
Whole Life Insurance Explained
Whole life insurance policies never expire. The coverage lasts as long as you pay the premiums. The initial premiums on whole life insurance are often higher than the premiums you might pay for term life insurance. The benefit of whole life is that the premiums never change. With term insurance, there is always the chance of paying higher premiums later on in life when you are forced to renew your policy.
In addition to providing a death benefit, whole life also offers a savings component. The savings element allows some of the money you pay in premiums to grow through investments. The extra money accumulates on a tax-deferred basis. Your policy may grow steadily or have a low cash value over the first few years and more cash value later on, depending on the policy you choose to purchase.
The cash value of a policy should not be confused with the face value. The cash value is the amount available to you while you are alive; the face value is the benefit paid to your family when you die. If you have accumulated enough money, you could use the cash value to pay the premiums on the insurance policy. You could also choose to borrow the extra money if you are ever in need of cash. Of course, any loan you take out against the cash value of your policy must be paid back with interest. Finally, there is always the option of cancelling the policy before you die and collecting the savings you have accumulated.
Types of Whole Life Insurance
There are several different types of whole life insurance policies that are available when you decide to purchase life insurance. The most common are:
Participating Whole Life – This type of whole life policy pays dividends from excess investment earnings to the policyholder. Dividends may be paid in cash or used by the policyholder to pay premiums or purchase additional death benefits.
Non-Participating Whole Life – This type of policy does not pay dividends, but it does have low, fixed-cost premiums.
Limited Payment Whole Life – Limited payment whole life policies offer lifetime coverage but allow policyholders to pay premiums for a limited amount of time, such as twenty years or up to age 65. Premiums are often higher than normal because of the shorter payment term.
Single Premium Whole Life – This type of insurance policy allows the policyholder to make one large premium payment. Once this payment is made, no further premiums are charged.
Intermediate Premium Whole Life – Intermediate premium policies are similar to non-participating policies. The only difference is that premium amounts can vary according to a formula established by the insurance provider. Premiums may be low or high, but will never exceed the maximum guaranteed premium stated in the policy.