What Is Whole Life Insurance As the most basic form of cash-value life insurance, whole life insurance is a way to accumulate wealth as regular premiums pay insurance costs and contribute to equity growth in a savings account where dividends or interest
As the most basic form of cash-value life insurance, whole life insurance is a way to accumulate wealth as regular premiums pay insurance costs and contribute to equity growth in a savings account where dividends or interest is allowed to build-up tax-deferred. The insurance component pays a stated amount upon death of the insured. The investment component accumulates a cash value that the policyholder can withdraw or borrow against
Whole life insurance provides lifetime death benefit coverage for a level premium in most cases. Premiums are much higher than term insurance at younger ages, but as term insurance premiums rise with age at each renewal, the cumulative value of all premiums paid across a lifetime are roughly equal if policies are maintained until average life expectancy. Part of the insurance contract stipulates that the policyholder is entitled to a cash value reserve, which is part of the policy and guaranteed by the company. This cash value can be accessed at any time through policy loans and are received income tax free. Policy loans are available until the insured's death. If there are any unpaid loans upon death, the insurer subtracts the loan amount from the death benefit and pays the remainder to the beneficiary named in the policy.
Whole life as a "death benefit with a savings component." The cash value reserve builds up against the death benefit of the policy and reduces the net amount at risk. The net amount at risk is the amount the insurer must pay to the beneficiary should the insured die before the policy has accumulated an amount equal to the death benefit. It is the difference between the current cash value amount and the total death benefit amount. The insurer is actually setting aside money as a cash reserve to pay the future death benefit claim. This suggests that the cash value is technically part of the death benefit, which is "earned" as cash over time. The lack of separation between the cash value and death benefit also explains why insurers do not pay both the death benefit and the cash value to the beneficiary.
The advantages of whole life insurance are guaranteed death benefits, guaranteed cash values, fixed, predictable annual premiums and mortality and expense charges that will not reduce the cash value of the policy. Riders are available that can allow one to increase the death benefit by paying additional premium. One such rider is a paid-up additions rider.
The death benefit can also be increased through the use of policy dividends, though these dividends cannot be guaranteed and may be higher or lower than historical rates over time.
Dividends paid on a whole life policy can be utilized in many ways. First, if "paid-up additions" is elected, dividends will purchase additional death benefit which will increase the death benefit of the policy to the named beneficiary. Since this additional death benefit generates cash value, it also increases the cash value of the policy. Another alternative is to opt in for 'reduced premiums' on some policies. This reduces the owed premiums by the non-guaranteed dividends amount. A third option allows the owner to take the dividends as they are paid out (although some policies provide other/different/less options than these - it depends on the company for some cases). A final option is to invest the dividends in the insurance company's general or separate account.
The first key advantage of whole life insurance is that the cost of the premiums paid to the policy never increases, as long as you make sure to pay the premiums and the policy doesn’t lapse. The reason why this is important is because with term policies, your rates rise over time. This is due to the changes in your health and age. As you get older, your chances of dying increase. Since the life insurance company takes on that risk, they increase the cost of premiums.
With whole life insurance, the premium cost stays the same as long as the policy is in force. Even if you become gravely ill, the cost never changes. It’s guaranteed – as long as you pay your premiums. In fact, as the years go by, the policy actually gets cheaper. This is because of inflation, which erodes the value of money. By having a premium that never changes, you are essentially paying for the policy with “cheaper dollars.
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Please Note: Product, coverage, discounts, insurance terms, definitions, and other descriptions are intended for informational purposes only and do not in any way replace or modify the definitions and information contained in your individual insurance contracts, policies, and/or declaration pages.