Whole life insurance is also called cash value insurance or permanent life insurance or straight life insurance. It provides coverage for the entire life as long as premiums are being paid. These premiums are decided at a fixed rate. Further, the insurance company invests some part of the premiums and creates a savings account or cash value that gradually accrues, and is tax deferred. This cash value can be withdrawn or borrowed. However, such a transaction can cause a decrease or cancellation in the death benefit. In case of the following four conditions, a whole life insurance may be purchased.
- It is possible to pay the premiums and obtain the required coverage
- The savings in the life insurance policy won’t be required for minimum ten years
- The policy is affordable and has good rates
- There is a need of more tax deferred savings
Some of the major advantages are described below:
1 – Constant or Fixed Premium
In term life insurance, the premium increases on renewal. In case of whole life insurance, the premium remains constant. It does not increase with time. Also, if dividends are used, the premiums that have to be paid are minimized.
2 – Death Benefit
The death benefit does not decrease in case of whole life insurance. When demise occurs, this death benefit is not subjected to federal income taxes. As per the requirement, the death benefit can be accepted as a lump sum amount or a monthly income.
3 – Cash Value
In contrast with other life insurance policies, the whole life insurance policy accrues usable cash. As the policy holder pays premiums, this cash goes on increasing. In case the policy is surrendered, the policy holder gets the cash values. This cash value is tax deferred.
4 – Dividends
A participating whole life insurance policy has a feature of dividends. These are received as cash. They can be used to minimize premiums, to generate interest or purchase paid up additions.
- The policy guarantees a high degree of safety.
- This insurance provides coverage for a lifetime.
- It generates tax deferred cash.
- Some withdrawals and loans are tax favored.
- A non-participating insurance has relatively less out-of-pocket premium payments.
- In participating insurance, the dividend can be used to purchase paid-up additional insurance, and this results in increasing the face value of the coverage.
- In limited payment insurance, the premiums are paid for a limited number of years, while the coverage is for the entire lifetime.
- In single premium insurance, there is only one large premium, and hence, the policy has an immediate cash value.
- In indeterminate premium insurance, the premium is adjustable, but never more than the maximum value stated in the policy.
- The policy holder can borrow a loan using the cash value as collateral.
Types of Whole Life Insurance
As is obvious from the above information that these benefits can be gained through different types of whole life insurance. Now, let us take a look at the major types, and understand their features in brief.
In non-participating whole life insurance, the premium and face value remains constant for the insured’s entire life. The costs of this policy are fixed, but it does not pay any dividends.
A participating whole life insurance has a feature of paying dividends. These dividends are a consequence of favorable mortality, excess investment earnings and expense savings. However, it is not warranted that these dividends would be paid to the policy holder. They may be used for a variety of purposes.
The above-mentioned categories have a variety of options which are mentioned below:
- Level premium whole life insurance
- Limited payment whole life insurance
- Single premium whole life insurance
- Indeterminate premium whole life insurance
The final decision to opt for insurance should depend on what sort of coverage you want and your current physical and fiscal health.