Select Page

Whole Life Insurance

Understanding Whole Life Insurance Along with The Pros And Cons

There are several life insurance types as I’m sure you now know, but which type of life insurance is best for you and your family?

If you are shopping for a life insurance policy it can be a little overwhelming trying to figure out which policy is right for you.  Today, we are going to talk about Whole Life insurance and, hopefully, help you decide if this is the best option for you. 

Many of the top questions life insurance shoppers ask include,

  • What does permanent whole life insurance mean?
  • What is whole life insurance?
  • Is whole life worth it? 
  • What is the difference between whole life and term life?

If you are looking for life insurance for the following reasons, then whole life  is a good choice:

  • You want coverage that will last throughout your entire life.
  • You want premium payments that never change.
  • You are looking for a guaranteed return on cash value that increases in the policy.

How does Whole Life insurance work?

What is whole life insurance?

Whole life insurance offers coverage for your entire life by providing you a lifetime death benefit.  Whole life has a savings element where cash value can grow.  Whole life insurance is also referred to as permanent life insurance or traditional life insurance.

Whole life insurance, like other policies, is designed to give financial protection for your family or a business should you pass away.  Whole life is a kind of permanent life insurance which is often referred to as cash-value life insurance. Permanent life insurance is one of two life insurance categories. Term life is the other category.

Which is better whole life or term life insurance?

The biggest difference between these two types of policies is this:

Whole life lasts throughout your entire life where term life ends after a certain number of years.  Term life is much simpler, it provides death benefits and for the most part, nothing else (unless riders are added). 

Whole life costs more because it offers cash value which is the added savings component.  Cash value is a savings account that accumulates funds by a percentage of your premium.  In turn, your insurance company will then pay interest on the money in your savings account  The interest is a dividend from your life insurance company’s yearly profits and most insurers guarantee a minimum annual return.

See related: Term vs Whole life

Should you convert term life insurance to whole life?

Maybe and here’s why.

Most term life insurance policies will allow you to convert to a permanent life insurance policy with that particular company. The conversion rules will explain when conversion can occur. The premiums of the new permanent policy is based off your health when you first applied for your term policy, but at the age you’re converting.

The type of policy that you can convert to is a major factor. Some companies may not have many options to convert to and you might only have 1 policy available. That one policy might be extremely expensive. Typically, the lowest cost and least expensive permanent conversion is to a Guaranteed Universal Life policy. If Whole Life insurance is offered, it very well could be the most expensive policy.

Whole Life insurance death benefit

The life insurance death benefit is a tax-free amount of cash paid out by the life insurance carrier should you pass away.  In other words, if you have a $750,000 life insurance policy, that amount is the death benefit.

The beneficiary that receives the death benefit is either a person, business or organization.  Beneficiaries can be your spouse, your kids, a friend, a trust, business partner, non-profit organization or other legal relationships or other organizations.  Also, you have the option of naming more than one beneficiary.

Your life insurance policy is paid for through your premium which is normally paid monthly or annually.  Again, whole life insurance policies last throughout your entire life as long as you continue paying the premiums.  For instance, if you buy a whole life policy when you are in your 40s and keep paying your premium until you pass away, your beneficiary or beneficiaries will receive the death benefit.

Is there cash value on whole life insurance?

Cash value is one of the most attractive features of whole life insurance.

But how does the cash value saving account work?

Each year, a percentage of your premium goes into a savings account which is held by the life insurance company which, in turn, contributes to the policy’s cash value.  The cash value in your account earns interest which is actually a dividend from the life insurance company’s yearly profits.  Generally, the growth rate is relatively small in comparison to other investments because your insurance company has other expenses such as underwriting costs and administrative expenses.  Because life insurance companies guarantee a certain amount of growth, yearly, whole life insurance attracts investors.

This is where whole life and permanent life policies can be a little confusing.  The cash value is an element of your life insurance death benefit.  The death benefit consists of the term insurance policy that we went over earlier and the cash value.  As the whole life cash value increases, the life insurance provided by the term life policy will get smaller.  At some point, your cash value will cover the entire death benefit and your whole life policy will no longer provide the term life element.  This can be a little confusing if you think when you die, your beneficiaries will receive the death benefit from your term life policy along with the cash value growth.  Again, the cash value will replace the term life feature over time and will represent the entire life insurance death benefit.

Can I borrow against my whole life insurance policy?

You also have the option to withdraw the cash value from your whole life insurance policy and there are several ways to do this.  Keep in mind, the only way to collect the full cash value before death is to cancel or surrender your insurance policy.  Life insurance carriers will usually charge a surrender fee and you may have to pay taxes and other fees on the cash value.  Even though you can cancel your policy at any time, the majority of growth in your cash value will not happen until you have held the whole life policy for anywhere from 20 to 30 years.  If you were to cancel after 10 years, you will not see your cash value increase significantly.

The advantage of whole life insurance

As long as you keep up your payments on your premium, your whole life policy will stay in effect throughout your entire life.

Your premium normally stays level throughout your entire life.  Most whole life policies feature level premiums meaning, your insurance company cannot raise your rates as you get older or if you become ill.  Although term life also has these features,  because whole life lasts longer, term life could be a concern.

A portion of your premium goes into a tax-deferred savings account along with interest.  Like all insurance products, your premium goes to the insurance company to help spread out any financial risks among a group of people.  Because your premium is set aside in your savings account, your provider will deposit dividends as an interest payment.  This makes cash value life insurance a little different.

You can potentially get some of the money you have spent on your premium because some of your premium is being put aside into your savings account giving you the ability to get that money.  That said, there can be problems.  If you try to make a withdrawal from your savings account, the insurance company will charge you administrative fees, penalties, other charges, and you will have to pay a tax penalty.  These penalties can be quite significant and will probably eat away at the earnings you’ve already gained in your savings account.

Normally, your life insurance provider will guarantee a minimum growth rate.  Because this interest is a dividend from your insurance provider’s profits, growth can vary quite a bit from year to year.

Lastly, your money is protected from the stock market.  Should the market go south, you will not lose your cash value and your returns are guaranteed.  Therefore, your cash value will grow even if other investments lose value or remain stagnant.

The downside of whole life insurance

Whole life is a great deal more expensive than a term life insurance policy offering the same amount of coverage.  This is because you are paying for the insurance policy along with putting money into the cash value savings account within the policy.

In many cases, whole life insurance policies will be abandoned at some point because of the expense.  Often, people do not properly estimate the ability to pay large premiums year after year. Statistics have shown that approximately 26% of whole life insurance policies will be surrendered within the first three years and another 45% in the first ten years.

If you surrender your policy too early, you run the risk of your cash value being too low. Even though your premium payments will remain the same, the percentage of it that goes into your savings account is not the same.  The first few years of your policy has a very low percentage of your premium going into the savings account while the rest is used to pay for upfront costs including administrative fees and agents’ commissions.  Although the amount increases over the years, if you fall into the 45% group canceling out within 10 years, this is a really bad deal.

When does whole life insurance make sense?

Although many providers, agents, and brokers are in favor of permanent life insurance policies such as whole life, these policies also have their fair share of critics including financial gurus.

Why should I have whole life insurance?

Should I buy whole life insurance? Whole life insurance is really good for some people such as those who are in a higher income bracket and have managed to max out their other tax-deferred accounts. Therefore, whole life insurance can help them manage their estates.  Also, if you have someone who has special needs and will need continued care after you have passed away, whole life is an excellent option.

Why not to buy whole life insurance

The majority of people are better off going with a term life insurance policy, especially if you fall into the 45% that will surrender your whole life at some point.  Going on a term life policy will give you more coverage at a much lower rate than for a whole life policy.  Obviously, this will make your payments much more affordable for the years you will be paying for it.

Keep in mind, insurance is not an investment and should not be treated as so.  Stay away from combining insurance and investments.

Alternatives to whole life insurance

Term life insurance is extremely popular and is very much like the life insurance part of whole life.  The exception being, it expires after a certain number of years.  Also, because term life is a great deal less expensive than whole life, you can opt for more coverage which will provide a larger death benefit and at the same cost.  Term life insurance is also very popular with financial experts because it is easier to understand and is so much cheaper.  Term life is very simply a good protection without any cash accumulations or bells and whistles.

Other permanent cash value life insurance policies include variable life insurance, universal life insurance, and variable universal life insurance.  That said, they are all very different as to how their cash value works. As permanent life insurance goes, whole life is the easiest to understand and the lowest risk factors because the the cash value feature is a very simple savings account.  The other three all have incorporated investment products with a wide range in returns.

Where to buy whole life insurance

Even though insurance providers are the ones who offer whole life policies, it is highly recommended you do not purchase directly from them.  So what is the best way to purchase whole life insurance? 

Who sells whole life insurance?

You should speak with an independent agent or broker who will help you compare different whole life insurance policies from the best life insurance companies.  That said, the same is true if you are considering term life insurance as different providers can have different rates.

Getting approved for whole life insurance

There are 3 leading kinds of the approval process:

  • The Simplified Process – You must answer some questions regarding your health but you do not have to take a medical exam.
  • The Guaranteed Process – You do not have to answer any health question, do not have to have a medical exam, and you will be approved.

Note: These two options are worth looking into if you have been turned down for life insurance due to health issues.  That said, there are concerns, the death benefits are extremely small and the cost per $1,000 of coverage is higher than policies that require a medical exam. Also, these policies will not pay out the full death benefit if you pass away within the first few years of coverage.

  • Fully Underwritten – this process usually includes filling out a very lengthy application and taking a medical exam.  That said, even if you have some medical issues, you can usually find the best price by applying for a fully underwritten policy!

In conclusion

Before deciding on a policy, speak with an agent or a broker to figure out what life insurance policy will work the best for you, your family, or your business before jumping in.  Whether you are looking for a permanent life insurance policy such as Whole Life or would rather go with term life, talking with someone in the know will benefit you enormously.  Again, do not purchase life insurance directly from an insurance company, the motive is to sell you a policy and if you do not understand life insurance, you could end up with something that is not right for you.

WHOLE LIFE INSURANCE

Whole Life Insurance Tips

  • Whole Life builds cash value.
  • It is a permanent product designed to last your entire life.
  • Not all companies publish Whole Life quotes online (limited results).
  • Contact us at (888) 411-1329 to get additional & customized quotes.
  • Customized quotes will typically have lower rates vs online results.