What is Whole Life Insurance?
Whole life insurance, sometimes called “straight life” or “ordinary life,” is a type of permanent life insurance and is the most well-known form of life insurance. Whole life insurance policies last the whole life of the policyholder and are paid out to the policyholder’s beneficiary or beneficiaries upon death provided that premiums are paid. It’s important to note that because whole life insurance lasts throughout the policyholder’s life, premiums are typically higher and cost more than term life insurance. Along with death benefits, whole life insurance also comes with a type of savings called “cash value” and may grow tax-deferred interest.
When trying to decide if a whole life insurance or a term life insurance policy is right for you and your loved ones, it’s important to understand the difference between whole life and term life policies, whole life insurance’s cash value, and death benefits.
Term Life Policy vs Whole Life Policy
When purchasing a life insurance policy, there are two types: term life insurance and whole life insurance.
Term Life Insurance
Term life insurance policies, often called “pure life insurance”, provide coverage for a set amount of years. Should you need further coverage if your term life insurance expires, you would need to shop for a new policy or convert your current one into a permanent life policy. On a term life insurance, policyholders pay premiums regularly and should they pass away while their term life insurance is active, their beneficiaries will receive death benefits. Term life insurance is usually the more straightforward option and the simpler option. Term life insurance is also usually the less expensive option due to the fact that there are no additional maintenance fees associated.
Whole Life Insurance
Whole life insurance, on the other hand, is a type of permanent life insurance that stays active during the policyholder’s whole life as long as premiums are paid. Whole life insurance also includes cash value, an investment-like savings that grows over time. A portion of your premium monthly goes to this tax deferred cash value account and the amount that is transferred is determined by your individual policy.
When choosing between whole life and term life insurance, be sure to be mindful of the following differences:
|Features||Whole Life Insurance||Term Life Insurance|
|Duration||Life||10, 20, or 30 years|
|Monthly Premiums||Level||Can increase or stay level|
|Low Monthly Premiums||No||Yes|
|Accumulates Cash Value||Yes||No|
|Guaranteed Death Benefits||Yes||Yes|
Whole Life Insurance Cash Value
Cash value is offered by both whole life and universal life insurance while whole term life policies do not. Whole life insurance policies allow you to tap into this accrued savings after a few years of having your policy. Keep in mind, however, that unlike universal life insurance that bases its credits on stock market index performance, whole life insurance policies credit interest on cash value based on dividends declared by the insurance company.
With whole life insurance, the insurance company will apply a portion of your paid monthly premium to your death benefits and the other portion in the market which in turn builds up cash value. There are three ways that you can use your accrued cash value:
- Taking out a loan against your policy: You can withdraw a portion of your accrued cash value as a loan that you will need to pay back with interest. The downside to this option is that if you fail to pay back the money, this amount will be deducted from the death benefits your beneficiaries will receive.
- Withdrawing money from your policy: You also have the option to withdraw money from your cash value life insurance policy. Remember though that doing this might result in a decrease in the amount of death benefits your beneficiaries may receive.
- Paying your premiums: After you’ve had your policy for at least one year, most insurance policies will allow you to pay your monthly premiums with accrued cash value.
In some cases, however, policyholders will want to cash out their whole life insurance in the form of a life settlement. With a life settlement, a third party pays for your policy and takes over premium payments. When you sell your life insurance during a life settlement, you forfeit any death benefits that your beneficiaries can receive upon your death. Although, you can choose to give them part of your settlement.
Generally, selling a whole life insurance is best for those over 65 years old and have a policy with a face value of at least $100,000. Especially for those with low life expectancy or facing expensive long-term care and you need the funds now, a life settlement makes financial sense. For others, they opt to instead take a loan against their cash value which is tax free after the first 15 years of the policy. In cases where the insured has a low life expectancy, they may still be able to qualify for a life settlement on their whole life insurance. If you need assistance with selling your whole life insurance, contact the expert staff at Harbor Life Settlement today.
Whole Life Insurance Death Benefits
A death benefit is an amount of money tax-free paid out by the insurance company in the event of the policyholder’s death. As a rough example, if a policyholder buys a $500,000 insurance policy, the death benefit would be $500,000 as well. Death benefits are paid out to beneficiaries in the event of a policyholder’s death. Beneficiaries can be a spouse, children, friend, non-profit organizations, or other legal relationships or organizations.
A key thing to note is that if there are any outstanding loans taken out against the policy’s cash value, that cost will be taken out of the total death benefits. Talk with your insurance company if there are available riders that will protect death benefits if the policyholder becomes critically or terminally ill. Some of the more common riders include accidental death waiver of premium riders.
If you or your loved one needs assistance on ways to afford any future expenses or need assistance in selling your whole life insurance, Harbor Life Settlements can help. Get in touch with one of our professionals today!