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What is Whole Life Insurance?

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Generally speaking, life insurance represents a contractual relationship between the insurance policyholder and the insurer. Under the terms of the contract, the life insurance company promises to pay a sum of money to the designated beneficiary — often a spouse, child(ren), or other family members or loved ones — upon the insured person’s death. 

The policy amount is often intended to cover the loss of the policy holder’s income and/or help their survivors with other living expenses, such as covering the family’s home mortgage or paying for children’s education. 

This article will help you determine whether a whole life insurance policy is right for you. It covers how whole life insurance works, explains the potential benefits of a whole life insurance policy, and discusses different types of policies. We’ll also compare whole life insurance to term life insurance and explore the costs of a whole life insurance policy.

Key Takeaways

  • Whole life insurance provides lifetime coverage, unlike term life insurance which only covers a specific term.
  • Premiums for whole life insurance are fixed, meaning they won't increase as long as the policy is active.
  • Whole life policies can accumulate cash value over time, which can be accessed through withdrawals or loans.
  • Various types of whole life insurance exist, including level premium, limited payment, and single premium policies.
  • The cost of whole life insurance depends on factors such as age, health, coverage amount, and premium payment structure.

How Does Whole Life Insurance Work?

The specific terms of each life insurance policy can differ, so we’ll look at just one scenario to illustrate how whole life insurance works. 

Let’s say you’re 45 years old and married with two children. You provide the primary financial support for your household. You decide to purchase a whole life insurance policy because you want your spouse and children to be protected if you should pass away. 

You want to make sure that your family will receive enough money to offset the financial losses they may experience after your death. You choose a whole life policy with a benefit that will be large enough to pay off your mortgage and other debts, pay for both children to finish college, and ensure your spouse continues to live a comfortable life without you.

When purchasing a policy, you must pay the premiums to keep the policy active.

You can surrender the policy at any time and receive its cash value, depending on the policy terms. You can also choose to take out a loan on the policy’s cash value. If you don’t pay the loan back before your death, the amount you borrowed will be deducted from the overall benefit paid out to your beneficiary. It’s also important to understand that loans accrue interest, and if not repaid, could cause the policy to lapse. 

You’ll likely choose your spouse as your primary beneficiary and your children as your secondary beneficiaries, who will collect if the primary beneficiary is deceased at the time of your death.

What are the Benefits of Whole Life Insurance?

Most people who choose whole life insurance do so because of the benefits of this type of permanent life insurance.

  • Whole life insurance offers lifetime coverage.  Because whole life insurance is a permanent life insurance policy designed to last a lifetime, it has no expiration date. As long as you make the required premium payments, the death benefit remains unchanged throughout the life of the policy.
  • Whole life insurance premiums are fixed. You never have to worry about your whole life insurance premiums increasing with age. Once you lock in the premium, it’s guaranteed to stay the same regardless of how long you hold the policy, the state of your health, or any life risks you might take. 
  • Whole life insurance policies accumulate cash value. Whole life policies can accumulate a cash value over time as the premiums you pay are invested. You should consult a finance professional to determine whether a loan or withdrawal is appropriate.

What Types of Whole Life insurance Are There?

There are different types of whole life insurance, and you may find that one is a better fit than another, depending on your circumstances.

Level Premium Whole Life Insurance

Level premium whole life insurance is the standard type of life insurance. Once you sign up for a level premium whole life policy, the premium amount you owe per year stays the same over the course of your lifetime. 

While you’ll probably end up making more premium payments in total than under other types of policies, you’ll pay a lower amount per year because the policy cost is spread out over a longer period. 

With some level premium whole life policies, the death benefit increases over time even though the premium doesn’t increase. 

Limited Payment Whole Life Insurance

Like other types of whole life insurance, limited payment whole life insurance offers lifelong coverage, staying in force for your entire lifetime. However, you only have to pay premiums for a fixed time. 

Once that time frame ends, you stop paying premiums but keep the coverage. Limited payment whole life insurance usually requires higher payments than a level premium policy, but you pay those higher premiums for a shorter period. 

Single Premium Whole Life Insurance

If you can afford to make a single lump-sum payment for life insurance coverage, you might want to consider a single premium whole life insurance policy.

You are guaranteed life insurance coverage for the rest of your life after making the initial payment.

There are a few types of single premium life insurance. While all offer the same guarantees of lifetime coverage, they accrue value in different ways depending on whether an interest rate on the lump sum premium is locked in at a set amount.  

  • Single premium whole life insurance policies are the most predictable. They come with a guaranteed interest rate. This lets you easily predict your policy’s cash value over time.
  • Single premium universal life insurance policies are less predictable. The interest rate on the lump sum premium goes up and down each year, depending on market conditions.
  • Single premium variable life insurance is also unpredictable, but you can exercise some control. Rather than locking in a fixed interest rate or taking a chance on an interest rate based on market fluctuations, you get to choose investment funds for your policy. The value of your policy will rise or fall based on the performance of the investment funds you choose.

What’s the Difference Between Term Life & Whole Life Insurance?

Whole life insurance is not your only life insurance option. Many people choose term life insurance, which differs from whole life in some significant ways.

While both whole life and term life insurance provide death benefits as long as premiums are current, term life insurance doesn’t guarantee the death benefit for a lifetime. Instead, you purchase term life insurance to cover a specific term, often 10 to 30 years. When the policy expires, the benefit expires. If you want to continue coverage, you must buy another term and pay higher premiums.

Is Term Life or Whole Life Insurance Better?

Deciding which type of life insurance to choose will depend on your financial situation, the type of protection you and your family need, and how a life insurance policy might fit into your investment portfolio.

If you’re relatively young and anticipate your need for life insurance will grow over time, it could make sense to purchase a whole life policy while you can lock in a low premium rate for a higher benefit amount. As you and your policy age, you’ll be able to watch your policy build cash value over time and then leverage that value as needed.

For example, you could take advantage of your policy’s cash value, borrowing against this living benefit to help defray the cost of your children’s education or pay for unexpected medical expenses. And you’ll still have the peace of mind knowing that your policy’s benefits will help take care of your family when you’re no longer there to support them.

Often, people nearing retirement age will purchase a whole life policy for an amount that will ensure their final expenses will be paid and provide their adult children with an inheritance to use to start their own nest eggs.

If you’re looking for a less expensive life insurance policy or only need coverage for a fixed time, a term life insurance policy might be the preferred choice. Term life insurance generally has lower premiums than whole life policy premium rates because of their built-in expiration dates.

Term policies can also be easier to get, especially for older people with health issues who prefer to forego a medical exam. While it won’t guarantee coverage over your entire life, term life insurance offers peace of mind for a limited time. This can be a welcome option for many people.

How Much Does Whole Life Insurance Cost?

How much life insurance costs depends on a number of factors, including:

  • Your age. The older you are when applying for a policy, the more your premium payments will be.
  • Your health. The healthier you are, the lower your life insurance costs. Conversely, your costs will be higher if you have pre-existing medical conditions or other health issues.
  • The amount of coverage. The higher the death benefit, the higher the policy cost. You can expect to pay a lot more for a $1 million policy than one that provides $100,000 in coverage.
  • How your premium payments are structured. Premiums spread out over a longer time will be lower on an annual basis than a single or limited premium, although you may end up paying more over time.

Because there are so many factors that go into creating a whole life insurance premium quote, the only way to determine which insurance plan is right for you based on cost is to request a personalized quote from a knowledgeable financial professional.

Can You Cash Out Whole Life Insurance?

As mentioned, the ability to tap into the cash value of your whole life insurance policy is one of its biggest benefits. Before taking his aspect of whole life insurance into account, it helps to delve a little deeper into what tapping into the surrender value of a whole life insurance policy actually means.

Your policy’s cash value is, in essence, a savings account that accumulates value based on a portion of your premiums. If you decide to cash out your whole life insurance policy, you don’t get all of the money in premiums back. Rather, you receive the full value of the policy when you cash it out, which will be some portion of the premiums you paid plus interest earned and minus fees.

Surrendering your policy may help you gain immediate access to cash, but it’s usually not recommended.

Cashing in a policy means cancelling guaranteed death benefits and losing any annual dividend payments.

While you can cash out your account if you prefer, you might consider taking a withdrawal or a policy loan instead. A withdrawal will reduce the payout amount while keeping the policy in force, while a loan — which also keeps the policy in force — can be paid back.

In some circumstances, policyholders make their premium payments from the accrued cash value of their policy, keeping the death benefit intact while lowering or eliminating their premium payment.

Who is Whole Life Insurance Ideal For?

Whole life insurance is a sound choice for anyone seeking long-term protection for their family, guaranteed savings, and on-demand liquidity. Young adults, individuals in mid-career, and those readying for retirement have all found reasons to pursue whole life insurance.

MORE Pros & Cons of Life Insurance for Children

Speak With Western & Southern Today To Find The Best Whole Life Insurance Policy For You

Determining which life insurance product, including which whole life insurance policy, is best for you and your family can be a daunting process. Fortunately, Western & Southern’s whole life experts are on hand to help you through the process of finding the policy that will meet your needs today and in the future.

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