Whole Life Insurance is a permanent life insurance. It generally has higher death benefit amounts than simplified Whole Life, also known as final expense. It also has a wider age range than simplified FE, going all the way down to new born age. Since this form of Whole Life isn’t simplified issue, there will be a paramedical exam performed on the applicant. There are a few companies that will forgo the paramedical exam, but most will require it. A Whole Life Policy Premium is level throughout the life of the policy, and the death benefit will never go down. They also build what is known as cash value.
Cash Value Account
- It grows slow, but it has a guaranteed rate of return, regardless of the market performance
- It earns interest on a tax-free basis as you make premiums
- It stays with the insurance company when the policyholder dies, unless there is a rider in place that states otherwise
- It grows at a fast rate during the first years of the policy, then growth slows as the policyholder ages, due to the increased cost of insuring
- Funded by a portion of the premium payment and earns interest
- A benefit that is a safe investment, and a savings account that can be accessed for the life of the policy
- There is a guarantee with the cash value, meaning the insurer pledges to give a minimum interest rate.
There are four ways to access your cash value
- Policy Loans – A policy loan is a tax-free and less restrictive than a loan from a lender or bank. The Insurance company lends you the money, and sets up a flexible payment plan that has low interest, and uses your cash value as collateral.
- Make Premium Payments – You can access your cash value to make your monthly premium payments. It will take several years to accumulate enough cash value before this is possible, but if the account is drained, the policy can laps. It is advised that if used for this, it should be temporary.
- Withdrawals – Policyholders can make a withdraw from the cash value, with partial cash surrenders. These partial cash surrenders are permanent and can reduce the death benefit. These withdrawals are taxable if they exceed accumulative amount paid in premiums. Withdrawing all of the cash value, will trigger a policy lapse.
- Policy Surrender – Surrendering your policy will cancel it, and the death benefit will also be canceled. Whatever cash surrender value is, that is what is received, minus any surrender charges and fees. All cash surrender value above paid premium amount, is taxable.
Things to keep in mind before borrowing from your cash value account
- Withdrawals and loans exceeding the cash value amount, are subject to taxation.
- Risk of policy lapsing
- Will reduce the death benefit
- May take up to 10 years to build enough funds to be able to borrow
- Can lapse your policy, nullify tax-exempt status and reduce the death benefit
Dividend paying Whole Life Insurance
A participating Whole Life Insurance Policy can earn dividends in addition to the guaranteed cash value and death benefit.
If the Insurance company makes a profit, policyholders receive dividends as a partial refund of premium. They may use these dividends in several ways:
- As a payment in the form of cash or check
- A contribution to the cash value account
- Purchase additional coverage
- Make future premium payments
What does Whole Life Insurance Cover?
- Your beneficiaries will receive a tax-free lump sum at the moment of your passing
- There are no restrictions on what the death benefit can be used for
- The death benefit does not change throughout the policyholder’s life, however if there are any unsettled cash value loans, they will be deducted from the death benefit.
- The policy can terminate at the maturity date, which is either at age 100 or 120. When the policy holder reaches this age, some companies pay out the cash value, and close the account. Others may extend the policy or nothing at all
- The minimum coverage amount can be as low as $50,000, and go to over $1.000.000
- Accidental Death – In most cases this rider doubles the death benefit, if death occurs due to an accident defined by the insurance company. This will be outlined in the policy.
- Terminal Illness – Will pay a portion of your death benefit early, if diagnosed with a terminal illness, and given 6 months or less to live
- Chronic Illness – Will pay a lump sum if loss of work due to a chronic illness
- Waiver of premium – Waves the monthly premium if the insured becomes critically ill
- Return of Cash Value – The cash value is forwarded to the beneficiary.
How expensive is Whole Life?
Whole Life Insurance is permanent insurance, and therefore more expensive than Term Life Insurance. The premiums can range from $30 to $300 per month, depending on the death benefit amount, and the factors listed below:
- Medical History
- Smoking Status
- Occupation (high risk jobs impact premiums)
- Hobbies (high risk hobbies impact premiums example: skydiving)
Types of premiums
- Monthly (highest ongoing premium)
- Quarterly (second cheapest ongoing premium)
- Annually (cheapest ongoing premium)
- Single paid up (One singer payment for entire policy. Roughly half of the death benefit)
- 10 year paid up (10 years of premium payments till paid in full)
- 20 year paid up (20 years of premiums payments till paid in full)
In conclusion, Whole Life Insurance can protect you and your family, while growing your wealth. If used correctly, Whole Life will pay your beneficiary, and usually within a short period. There is a famous financial advisor, who says that whole life is bad, stay away, but did you know that most Term policies cancel you when you reach a certain age? What will you do for life insurance in that situation? You won’t be able to get other coverage due to your age. Permanent Life Insurance is the way to go. You will never get canceled as long as the premiums are getting paid.