Whole life insurance is a common type of the permanent life insurance for someone who wants to find a way to help guarantee the family’s financial future. As long as the premiums are paid on time, the insured person can be covered for the entire life. Besides, whole life insurance offers a savings component called cash value which can accumulate with a certain rate of interest, which means a whole life insurance policy can offer a person flexibility to help keep him /her covered while also growing the savings.
Each time the policyholder pays the premium, a small amount will be set aside and it will build up over time as the life insurance policy’s cash value. The longer a person can hold the policy, the more cash value the policy will build. Once the policyholder dies, a death benefit, which is a pre-specified amount paid by the whole life insurance policy will be given to the person previously chosen by the policyholder as the beneficiary, who are usually the spouse, children or other family members of the policyholder.
Whole life insurance can be classified into three primary types: traditional whole life, universal life, and variable universal life. The cash value can vary with different types of the insurance.
Traditional Whole Life
With such a policy, the policyholder is guaranteed the same premium and death benefit for the duration of the policy. Although this type of insurance is not cheap, it proves to be a more affordable choice as people age. The policyholder can also choose to pay more than the minimum premium amount so that the extra funds can go into a savings account. The money can be given back if the policyholder decides to get rid of the policy.
With a universal life policy, the policyholder can still opt to add money into the savings account in addition to the premium, but the interest is earned on the balance, thus allowing the savings to grow. Later, people can choose a lower premium and use the funds in the universal account to cover some or all of the payments.
Variable Universal Life
A variable universal life policy allows people to invest the savings. The money in the savings of this insurance can be put into stocks, bonds, or a money market account. This means the savings have the potential for both growth and decline. If you buy this king of policy, you may need to either adjust the value of the death benefit or the premium payment properly.
Advantages of the Whole Life Insurance
- Permanent coverage is guaranteed.
If the coverage does not lapse at any time, the premiums can be consistent throughout the entire duration of one’s life. Purchasing a whole life insurance policy early enough can enable one to have affordable coverage for beneficiaries even of the policyholder lives to a ripe old age.
- The cash value provides flexibility.
A built-in savings mechanism offered by the whole value policy can become a part of the long-term financing planning as people have the chance to personally use the cash value in different ways throughout the life.
- A fixed death benefit is offered.
As long as policyholders are able to pay the premium, a fixed death benefit can be provided. Also, one can choose the amount when first opening the policy and the premium payment can reflect the value of the benefit.
Disadvantages of the Whole Life Insurance
- The premiums are more expensive.
Compared to the term life insurance, a whole life insurance is relatively more expensive as it is permanent.
- Administrative costs are high.
Hefty administrative fees can be involved in the cash value component of the policy, especially if the policyholder decides to invest.