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Table of Contents Expand. What Is Whole Life Insurance? Type of Permanent Insurance. Pros of Whole Life Insurance. Cons of Whole Life Insurance. The Bottom Line. What is whole life insurance? Why buy whole life if it costs more? Key Takeaways Whole life is a type of permanent insurance that can last for your entire lifetime.
Whole life costs more than term life insurance, which expires after a certain number of years. A whole life policy also has a savings component that can build cash value over the years.
Cons Higher cost Smaller death benefit Lack of investment control. Article Sources. Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts.
We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.
Related Articles. Life Insurance Term vs. Life Insurance Variable Life vs. Variable Universal: What's the Difference? Life Insurance Cash Value vs. Surrender Value: What's the Difference? Partner Links. Related Terms Term Life Insurance: Uses, Types, Benefits, and More Term life insurance is a type of life insurance that guarantees payment of a death benefit during a specified time period.
Reading Into Nonforfeiture Clauses A nonforfeiture clause is an insurance clause allowing an insured party to receive full or partial benefits or a partial refund of premiums after a lapse.
Whole life insurance guarantees payment of a death benefit to beneficiaries in exchange for level, regularly due premium payments. In the savings component, interest may accumulate on a tax-deferred basis. Growing cash value is an essential component of whole life insurance. To build cash value, a policyholder can remit payments more than the scheduled premium known as paid-up additions or PUA.
Policy dividends can also be reinvested into the cash value and earn interest. The cash value offers a living benefit to the policyholder. Over time, the dividends and interest earned on the policy's cash value will often provide a positive return to investors, growing larger than the total amount of premiums paid into the policy. In essence, it serves as a source of equity.
To access cash reserves, the policyholder requests a withdrawal of funds or a loan. Interest is charged on loans with rates varying per insurer.
Also, the owner may withdraw funds tax-free up to the value of total premiums paid. Loans that are unpaid will reduce the death benefit by the outstanding amount. Withdrawals and unpaid policy loans reduce the cash value of the policy. Depending on the policy type and the size of its remaining cash value, a withdrawal could moreover chip away at the death benefit or even wipe it out altogether.
While some policies are reduced on a dollar-for-dollar basis with each withdrawal, others such as some traditional whole life policies may actually reduce the death benefit by an amount greater than what is withdrawn. Whole life insurance is different from term life insurance, which only provides coverage for a certain number of years, rather than a lifetime, and only pays out a death benefit. Term life does not have a cash savings component.
The death benefit is typically a set amount of the policy contract. Some policies are eligible for dividend payments, and the policyholder may elect to have the dividends purchase additional death benefits, which will increase the amount paid at the time of death. Alternatively, unpaid outstanding loans taken against the cash value will reduce the death benefit. Many insurers offer riders that protect the death benefit in the event the insured becomes disabled or critically or terminally ill.
Typical riders include an accidental death benefit and waiver of premium riders. The named beneficiaries do not have to add money received from a death benefit to their gross income.
However, sometimes the owner may designate that the funds from the policy be held in an account and distributed in allotments. Interest earned on the holding account will be taxable and should be reported by the beneficiary.
Also, if the insurance policy was sold before the death of the owner, there may be taxes assessed on the proceeds from that sale. As is the case with any kind of permanent policy, it's important to thoroughly research all insurers being considered to ensure they're among the best whole life insurance companies currently operating.
For insurers, the accumulation of cash value reduces their net amount of risk. Whole life insurance lasts your entire life and has an investment account, which makes it a more complex and expensive product. With either policy, your loved ones can spend the payout — called the death benefit — on a variety of costs, such as funeral expenses, mortgage payments, college tuition and more.
But depending on your coverage needs, one type of life insurance may be a better fit than the other. The way term life insurance works is simple: It covers you for a fixed period of time, such as 10 or 20 years, and pays out if you die during the term. With most policies, the death benefit and your insurance premiums stay the same throughout the term. For example, if you're a new parent, you might buy a year policy to cover you until your child no longer relies on you financially.
Whole life insurance is the most common type of permanent life insurance and costs more than term life. This is because it offers lifelong coverage and pays out regardless of when you die. It also has an investment component called a cash-value account. A portion of your premiums are paid into the account, and it grows over time. Premiums remain the same for as long as you live, the death benefit is guaranteed and the cash-value account grows at a guaranteed rate.
Policy feature. Term life. Whole life. Might be eligible for annual dividends. Life insurance payout amount is guaranteed. Whole life insurance premiums are much higher because the coverage lasts your lifetime, and the policy grows cash value.
Person covered. Average of three lowest prices available in each category for healthy men and women. Source: Quotacy.
Age is at time of issuance. Premiums stay level throughout the length of the policy. Term life is sufficient for most families, but whole life and other forms of permanent coverage can be useful in certain situations. Only want life insurance to cover a short-term need. A term life policy can replace your income if you die while you still have major financial obligations, such as raising children or paying off your mortgage.
Want the most affordable coverage. Many term life policies can be converted to permanent coverage.
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