September is known as “Life Insurance Awareness” month, and with that we break down the pros and cons of whole life insurance. But first we will share a little background on whole life insurance and the difference between term life insurance.
In term “universal” life insurance and whole life insurance you will pay premiums for a specified term, which is usually 20 or 30 years. If you die within that term the insurer will pay your survivors a benefit. As with other insurance, like your auto insurance, if you stop paying premiums, you will then lose your insurance. As far as whole “permanent” life insurance, your insurance will remain active as long as you’re paying premiums. Additionally some of the money you pay in premiums accumulates as a cash value, which you can use as cash value to save for retirement or take loans against it throughout life.
The big difference between whole life insurance and universal life insurance is that whole life insurance premiums are fixed for life while term life insurance allows you to adjust the premiums and death benefit as you go.
As a reminder life insurance is not to be mistake for annuities, which are long-term investment issued by an insurance company and designed to help protect you from the risk of outliving your income. Through annuitization, your contributions (purchase payments) will be converted into periodic payments that can last for life.
Now that we’ve covered the basics of life insurance let’s get into the pros and cons of whole life insurance, courtesy of JRC Insurance Group:
Pros of Whole Life Insurance
A whole life policy covers you for your entire lifetime. The premiums you pay are guaranteed for the lifetime of a policy. Although the premiums appear more expensive than a term policy, you don’t have to worry about the premiums increasing, as it may if you have a term policy and the initial term expires.
This way you can be assured that your coverage will be available down the line to help your family pay the mortgage and other bills.
Life insurance gets more expensive as you age and the cost of renewing a 20 year term policy when you’re in your late forties or early fifties might be a bit of a shock. With whole life, your family will have insurance protection for your entire lifetime.
Whole Life Savings/Investment Feature
If you are not good at saving or investing money, then a whole life policy might be an ideal solution for you. Any money you invest in the stock market or other investments, and even the money you leave in a savings account earns interest that is taxable by the IRS.
However, one of the great benefits to whole life insurance is the ability, in some cases, to take non-taxable loans from the policy. Therefore, you might look at the money you earn on interest in the cash value accumulation portion as “non-taxable.” And like any type of life insurance, the benefit is also non-taxable when it is paid to your beneficiaries when you die.
Whole Life Insurance is Guaranteed
Most whole life policies sold offer a guarantee. The premiums you pay are guaranteed and you are also guaranteed a minimum rate of interest on the cash value accumulation portion on most policies. Although some people say the rate of return is low, this is not always the case.
When economic times are good, the rate of interest also increases on your account. When times change and investments plunge, you are guaranteed a minimal amount of return. Think of the “tortoise versus the hare” race.
Can Borrow Against the Cash Value of a Whole Life Policy
Another convenient feature of a whole life policy is that you can borrow against the cash value accumulation feature. You can borrow up to certain percentage and after a set number of years and use the money anyway you wish.
You have the option of either re-paying the loan if you choose to do so. If you don’t repay the money, it would affect the amount of your death benefits should you die later on and haven’t re-paid the money you borrowed. Also, the money you borrow is also non-taxable.
Cons of a Whole Life Insurance Policy
Whole Life Is More Expensive
A whole life policy does cost substantially more than what you would pay for a term life insurance policy. This is because a chunk of the premium is used to cover the cash value accumulation feature. The larger the policy you buy – the greater the cost which stands to reason.
Make sure you read the entire illustration or policy ledger and see the fine print in your policy for how long it’s guaranteed and any exclusions the policy may have.
Low Interest Rates on Whole Life Policies
If you’re savvy with saving and investing money then this type of policy might not be the best way to go. The interest rate you earn on the cash value accumulation portion could be considerably less than if you invested it elsewhere such as a money market fund, the stock market or other interest bearing investments.
Whole Life is Inflexible
A whole life policy is very inflexible compared to other types of life insurance policies such as universal life for example. You won’t know how your premium is being used and what portion of the premium is being applied to the death benefits or how much is going to the cash value accumulation.
You generally have no choice about altering any aspect of a whole life policy. A universal policy allows you to alter your death benefits and gives you some flexibility in how you pay your premiums.
No Investment Options on Whole Life Policies
A whole life policy does not give you any say in how the cash value accumulation is invested. If the investments made by the insurance company perform well, then you also benefit, but if they do poorly then at best you will only get the guaranteed minimum rate of return.
Other policies such as a variable life insurance policy give more options in how the money should be invested and allow you to choose between bonds, a money market or the stock market.
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Photo Credit: JRC Insurance Group