What is Whole Life Insurance?
Posted in Life Insurance
January 16th, 2009
Unlike term life insurance, which covers you for a specified period of time, a whole life insurance policy remains in effect for your entire life. Also sometimes called permanent life insurance, this type of policy combines an investment product with pure life insurance, as the insurance company invests a portion of your premiums to create cash value. Your return on the investment is tax-deferred until you cash out the policy, or tax-free if it is paid out as a death benefit. You can also borrow against the principal.
Some common types of whole life insurance policies include universal life and variable life insurance.
Advantages and Disadvantages of Whole Life Insurance
If you are looking for constant medical coverage over your entire lifetime with no medical exams in the future, you might want to look into a whole life policy. Younger purchasers may also have certain advantages, as premiums will remain constant throughout their lifetime, unless they make changes to the policy. A whole life insurance policy also offers a tax shelter on returns, and one of its selling points has traditionally been the forced savings aspect of investing in the policy as a cash asset.
One of the disadvantages of this type of insurance is that it is substantially more expensive than a term life policy. Both term insurance and whole life insurance use the same mortality tables for calculating the cost of insurance – however, because term insurance is likely to expire without paying out, the premium rate is substantially different. Whole life insurance must always pay out eventually, since it is covering you until death. The cost of this payout is built into the cash accumulation component, which reinvests the premiums to allow the policy to self-insure.
You should also consider how much insurance you really need over the course of your lifetime before committing to a whole life policy. Consult with your life insurance agent or broker and run an analysis on the costs and benefits of both temporary and permanent policies to determine which option is right for you.
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