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Understanding Whole Life Insurance

Life Insurance
older couple laughs as they ride bikes down a path and discuss whole life insurance together

Like many important yet sensitive personal matters, life insurance is a topic people rarely want to discuss. Yet conversations around life insurance can help you figure out the best options for protecting your loved ones.

That's why understanding the basics of life insurance is key to discovering which policy is right for you. So, if you're exploring whole life insurance, or have some questions about your existing policy, you can review the fundamentals here.

What Is Whole Life Insurance?

Whole life, also known as permanent insurance, is a type of insurance policy designed to last your whole life, rather than a specific term. So as long as you make your premium payments on time, your policy will never expire. The premiums on whole life insurance also remain the same throughout your life.

Some whole life insurance policies accumulate cash value, which is money you can spend and borrow against while you're still alive. The cash value benefit increases every year as you contribute premiums to the policy, and some insurance companies also pay interest on your cash value balance. Cash value loans accrue interest, however, and may generate income tax liabilities (along with withdrawals). In addition to reducing the cash value, loans and withdrawals can also reduce the value of the death benefit and may cause the policy to lapse.

One key difference between whole life insurance and other insurance plans is the length of time you are given to make payments. At some point, your whole life policy will be paid in full — this could be in 20 years, or it might be paid off once you turn 65. If you're interested in a policy that can be paid off quickly, your monthly payments have the potential to be larger. It's ultimately a matter of preference — and your stage in life.

Another difference between policies is that some whole life insurance options don't offer cash value, and only pay out a death benefit after you pass away. In exchange, these plans charge a lower monthly premium. This can make them a good option if you simply want insurance protection for your heirs.

When Could Whole Life Be a Good Fit?

Whole life insurance could cover your final expenses or provide an inheritance — among other things. For these reasons, you don't want a policy that could expire, as there's a possibility that your coverage will terminate right before you pass away — leaving your beneficiaries with nothing.

For example, Steve is a 61-year-old mechanic who's approaching retirement. His kids have all completed college. He had a term life insurance policy when they were younger, but that policy just lapsed. Steve replaces his old plan with a $100,000 whole life policy. He decided it would be adequate to cover his final expenses, while leaving a small inheritance for his adult children.

Whole life insurance can also be a great fit for people who want to secure permanent coverage and set aside money for the future. For example, Susan is a 31-year-old architect. She doesn't have any children but wants them in the future. After reviewing her options, she decides to purchase a $250,000 whole life policy. She likes the idea of accumulating cash value and knows permanent life insurance is a good way to protect the future of her family. Since she's purchasing her policy while she's young, she'll be guaranteed a low price for the rest of her life.

Any Special Considerations?

Whole life insurance has a different cost structure than term life insurance. So, it's important you think carefully about what your life insurance needs are, and consider a policy that matches your needs. In addition, make sure the option you choose has an adequate death benefit to help meet your coverage needs. Consider which policy will best suit your lifestyle to find the best one for your long-term objectives.

Once you're ready to purchase a policy, be sure you can make a long-term commitment. Remember: whole life insurance is a purchase that can improve over time. The longer you maintain your policy, the more you'll benefit from locking in a low premium and building cash value. 

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Information provided is general and educational in nature. It is not intended to be, and should not be construed as, legal or tax advice. Western & Southern Financial Group and its member companies (“the Company”) does not provide legal or tax advice. Laws of a specific state or laws relevant to a particular situation may affect the applicability, accuracy, or completeness of this information. Federal and state laws and regulations are complex and are subject to change. The Company makes no warranties with regard to the information or results obtained by its use. The Company disclaims any liability arising out of your use of, or reliance on, the information. Consult an attorney or tax advisor regarding your specific legal or tax situation.