Whole life also known as straight life, or permanent life insurance provides lifetime protection for a specific amount. Whole life is basically term insurance with the addition of an investment component. Whole Life Insurance has a lot of advantages over Term Life Insurance.
Whole life policies are generally a little more expensive, but work especially well for estate planning, because the policy can be set up to pay estate taxes upon death. This can save heirs hundreds of dollars because the estate then does not have to be settled through the government. Other advantages of whole life insurance include:
· The value of the policy grows over time because of the investment aspect of the plan. The policy owner can also decide how to use the dividends from a whole life insurance plan. They can either be used to pay premiums, buy more insurance, or be paid in cash to the policyholder.
· Premiums remain level for the life of the policyholder. With this in mind it is often best to buy when you are younger to get lower premiums.
· Whole life insurance has a guaranteed cash values. This means that some of the money paid into the policy accumulates a guaranteed cash values. If you decide to surrender the policy, which means that you sell it before the death of the policyholder, the cash value is available for your use. The policyholder can also use the policy to borrow money against the cash value as a policy loan with the current policy loan interest rate.
· The accumulated cash value can be used at retirement to supplement the retirement income.
· The cash value is tax-deferred until you withdraw it.
· A portion of the premium goes toward your cash value. In this way, the entire policy could be paid for in a few years.
· Unless you make a change to your policy you do not have to have any other medical exams to maintain the insurance.
Different Types of Whole Life Insurance
The Most common type of whole life insurance are traditional, interest-sensitive and single premium. Traditional has a guaranteed minimum rate of return of the cash value. Interest-sensitive has a variable rate of return on the cash value, like an adjustable rate mortgage. This gives the policyholder the ability to increase the death benefit without increasing premiums. Single-premium is when a person has a large sum of money to purchase a policy in whole up front. This type of whole life insurance still has the same tax deferment and accrues cash value.
When you should not put your money in Whole Life Insurance
Whole life insurance should not be used as an investment tool. Most experts agree that even with the tax deferment benefits, that a whole life policy is not a good way to make investments for the long term. If you are looking for an investment strategy, there are other options that will give a higher rate of return and cost less. There is also what is known as “lost opportunity” cost. This happens because your money is tied up in a whole life policy, when you may have been able to use it to invest in other options that would have provided more value than the insurance policy. It is best to talk with a financial advisor to determine if a whole life policy is right for you.