The Skinny on Whole Life Insurance
A whole life insurance plan is one kind of permanent life insurance that provides coverage for the policyholder’s entire life. Contrasted with term life insurance which offers coverage for a specific period of time, a whole life plan will not run out and has an investment portion that accumulates cash that the insured can borrow against.
Whole life plans assure the insured a guaranteed sum of money to leave for his beneficiaries regardless of his lifespan as long as the policy remains active. Most of these policies come with a clause that allows the insured to cancel their coverage and take back a cash surrender amount.
Since a whole life insurance plan provides coverage for the duration of the insured’s life, the premium will have to be paid for a pre-determined period to be able to get the death benefit. The policy is active for the rest of the insured’s life and covers life as well as provides a savings component. Policyholders may pay higher premiums at the onset of the policy as compared to term life.
Where Do Your Savings Go?
Insurance companies offering whole life plans puts part of your premium in high interest bank accounts. Your cash value rises with each premium payment. The savings element builds up on a tax-deferred basis. The guaranteed cash value makes this policy attractive to investors as they can borrow against the policy or surrender the plan altogether and receive a lump sum.
Some insurance companies allow their policyholders to participate in the company’s investment scheme where they get paid dividends annually. Participants can opt to withdraw their dividends or roll them over to accumulate interest. Dividends can also be applied to premium payments or used to purchase additional coverage.
Whole life plans are designed to fulfill the insured’s long-term financial goals so it is vital that it is kept alive throughout the insured’s lifetime. The ideal time to purchase whole life insurance is while the insured is young so that they may be able to pay for it over time. These policies are ideal for long-term financial responsibilities such as income replacement for the dependents left behind or for death expenses.
At the heels of the financial downturns in recent years, more and more people are purchasing whole life insurance. If you feel that this coverage is for you, look for a plan that combines reasonable premiums and dividend payments. The interest in whole life insurance increased after the 2009 financial crisis and since then, the cost of this insurance product grew steadily.
Like any other insurance products, whole life policies come with a set of drawbacks. Some of the things that could discourage people from purchasing whole life policies are the high premiums and agent commission fees, the steep cancellation charges, and the unexplained annual costs. As with all other life policy the premium of a whole life insurance is computed based on the insured’s health and age.
Many people have turned to permanent life insurance policies after poor results from investing in other types of funds. But whole life insurance may not be suited for everybody. There are some things to consider when contemplating and investment in this type of insurance coverage.
To be able to borrow against the policy tax-free, policyholders need to follow stringent rules. This type of insurance product makes a lot of sense for people who have maxed out their other tax-advantaged plans like their 401ks. A lot of policyholders find that they cannot keep up with the annual premiums and decide to cancel their policy a little after breaking even or sometimes even before they break even. It is estimated that around 20 percent of whole life policies get terminated during the first three years and 39 percent are canceled during the first 10 years.
If you feel that you might not be able to keep up with the premiums of a whole life policy for more than ten years, then you would be better off with a term life policy. Agents of whole life policies get their commissions up front and this can amount to about half of the value of your annual premiums suggesting that it could be a long while before your premiums catch up with the cash value of the policy and before you can borrow against the savings component of your whole life plan.