You’ve heard that whole life insurance is a great policy, but is it the best option for you?
Let’s break down everything you need to know, so you can make the right decision.
- What Is Whole Life Insurance?
- Whole Life Insurance vs. Term Life Insurance
- How Does Whole Life Insurance Work?
- Is Whole Life Insurance Worth It?
- Best Whole Life Insurance Companies
- Whole Life Insurance Policies – What to Look for When Buying
- How Much Does Whole Life Insurance Cost?
- Guaranteed Acceptance Whole Life Insurance
- FAQ
- Final Words
What Is Whole Life Insurance?
Whole life is a type of permanent life insurance. Unlike term life insurance, which only lasts for a set number of years, whole life insurance covers your entire life.
But whole life insurance is more than just protection. It also builds cash value over time that you may use for policy loans, supplemental retirement planning, pension maximization, or cash withdrawals.
And while it may be a great option, it’s not for everyone.
Whole Life Insurance vs. Term Life Insurance
When comparing whole life insurance to term life insurance, understand the key differences:
- Term Life Insurance:
- Provides coverage for term lengths between 1 – 40 Years.
- No cash value accumulation
- Affordable coverage to protect income, cover mortgages, and pay debts.
- Lower premiums than whole life insurance.
- Whole Life Insurance:
- Covers you for your entire life
- Builds cash value over time
- Can be used for supplemental retirement income, policy loans, etc.
- More expensive than term life insurance.
The first step is to determine your life insurance needs by categorizing short-term and long-term goals. We can help you with this and our Life Insurance 101 guide is a great resource.
How Does Whole Life Insurance Work?
Many people wrongly believe that policies are completely guaranteed, and that may not necessarily be the case.
The agent must provide you with a product illustration from the company. This illustration will be 10-20 pages and will provide you with the information you need to make an informed decision.
The illustration will show you FIVE critical features and benefits you must understand before buying whole life:
- Death Benefits – Guaranteed vs. Non-Guaranteed
- Premiums – Guaranteed vs. Non-Guaranteed
- Cash Values – Guaranteed vs. Non-Guaranteed
- Dividends – Understand how dividends affect your policy.
- Riders – Understand what riders do for your policy and how they affect it.
Death Benefits
With whole life insurance, there is typically a base amount of coverage guaranteed for life, and then non-guaranteed death benefits consisting of a one-year term and paid-up additional insurance that are purchased each year with the dividends from the life insurance company.
The non-guaranteed death benefits in the illustration are based on fixed assumptions, but the reality is the values will fluctuate based on actual performance which may be better or worse.
In addition, if you withdraw cash or borrow from your policy, it will affect how the policy performs.
Premiums
Premiums are guaranteed for the base coverage, and non-guaranteed premiums are tied to cash value and dividend performance.
Important Note – While the non-guaranteed premium may remain the same in all years, the policy performance will fluctuate. The life insurance company will send you an annual report you need to review and compare to the original illustration each year.
If you see significant differences between the illustration and the annual report, you may need to pay additional premiums to keep the policy performing as originally illustrated.
Cash Values
Your policy will have guaranteed and non-guaranteed cash values. When you die, your beneficiary receives the death benefit, not the cash value. They don’t get both.
The appeal is the potential to accumulate cash that can be accessed using tax-deferred and tax-advantaged strategies that policy loans offer.
You may use the cash to supplement retirement or how you see fit.
As Mass Mutual’s disclaimer explains, borrowing against a policy can be complicated even though you may do so.
Access to cash values through borrowing or partial surrenders will reduce the policy’s cash value and death benefit, increase the chance the policy will lapse, and may result in a tax liability if the policy terminates before the death of the insured.
Mass Mutual
Ask for illustrations showing future withdrawals to give you a better idea of what to expect.
Dividends
A policy that pays dividends is called a “participating” policy.
The IRS defines dividends as a return of the excess premium you paid into the policy; therefore, they are not taxable.
And while dividends are not guaranteed, companies that pay dividends are quick to point out their history of consistency and performance. The insurance company declares the annual dividend rate to be paid out.
When you buy whole life, the illustration will indicate how your dividends will be used:
- Paid to you in cash each year
- Used to lower your overall premiums
- Purchase Paid-Up Additions (PUA)
- Used to buy one-year term insurance
- Dividends may be paid towards outstanding loan balances or interest.
- Accumulate in the policy as cash value.
The most common dividend option selected is to purchase Paid-Up Additions.
You may change how dividends are applied to your policy in future years.
Riders
Companies offer life insurance riders so you can customize your policy. Examples include long-term care, accelerated benefits, waiver of premiums, and term insurance riders.
Is Whole Life Insurance Worth It?
Whole life insurance offers many benefits but it’s not the best option for everyone.
Some pros and cons to consider:
Pros
- Lifetime coverage
- Cash value accumulation
- Fixed premiums
- Dividends
Cons
- Expensive
- Complex to understand
- Conservative returns
- Many benefits are not available until later
The knock against whole life insurance is about the price.
In our experience reviewing policies, whole-life buyers tend to be underinsured.
Best Whole Life Insurance Companies
When shopping for whole life insurance, compare policies from reputable companies. Some of the top companies include:
- AIG
- American National
- Assurity
- Foresters
- Gerber
- Guardian
- Kemper
- Mass Mutual
- Nationwide
- New York Life
- Northwestern Mutual
- Penn Mutual
- Protective Life
- United of Omaha
Several of the above companies also provide group life insurance policies to employers.
Whole Life Insurance Policies – What to Look for When Buying
Different types of policies are available.
Choices include single premium, limited pay, guaranteed issue, interest-sensitive, and participating whole life policies.
Furthermore, traditional death benefit settlement options such as lump sum, life income, and fixed amount death benefits are available for whole life.
How Much Does Whole Life Insurance Cost?
Whole life insurance is more expensive than term and universal life insurance because of its lifetime coverage and cash value feature. The exact cost depends on gender, age, health, and your chosen death benefit amount.
If you are uninsurable, your best bet may be a small guaranteed issue final expense policy.
Guaranteed Acceptance Whole Life Insurance
Some companies offer guaranteed acceptance policies if you want a life insurance policy of $25,000 or less.
These are mainly used as life insurance for seniors.
We have guaranteed acceptance policies from AIG, Kemper, Wellabe, United of Omaha, and Gerber Life.
Initially, the death benefit is graded during the first few years of the policy.
Most of these types of policies require little, if any, medical underwriting.
Do you use tobacco products? If you smoke cigars, chew tobacco, or pipe tobacco, we can get you non-smoker rates with the right companies.
FAQ
Whole life insurance lasts your lifetime and may provide cash value accumulation and dividends.
Term life insurance is temporary, providing protection for a specified term length.
Whole life insurance lasts for your lifetime and may provide cash value for you to access during your lifetime.
With whole life insurance, your premiums purchase death benefit protection.
Whole life insurance can accumulate cash values that you can access later through surrenders or policy loans.
Final Words
Whole life insurance can be a great option if you want permanent life insurance, and should be compared to universal life insurance options that offer similar guarantees and cash value at a lower price.
Take the next step by requesting a whole life insurance quote today!
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