Understanding Whole Life Insurance

Whole life insurance is often referred to as a permanent life insurance product. This means that no matter how old you are when you die, and even if you become ill or are diagnosed with a disease at some point, your beneficiaries will receive a death benefit. 

 Permanent life insurance and term life insurance are the two main types of life insurance. Term life insurance covers the insured person for a set amount of time, often in terms of 10, 20, or 30 years. If they die while the term policy is in force, their beneficiaries receive the face value of the life insurance policy. If they outlive the term of the policy, it expires. They can then choose to purchase a new policy if they wish. 

Whole life insurance has two parts. It has a life insurance component that pays the policy owner’s designated beneficiary a death benefit. It also has a cash value component that can gain value over time. Whole life insurance is more versatile in that the policy owner can take out tax free loans against the cash value of the policy when values become sufficient to do so. If they decide they no longer need the insurance, they can surrender the policy back to the insurance company and get any available cash value in a lump sum.

Another differentiating factor between whole and term life insurance is the cost. Because of the lifetime coverage and the cash value aspect of the policy, whole life insurance policy premiums are higher.

Cash value is what some refer to as a savings-like component of a whole life insurance policy. It grows slowly, on a tax-deferred basis, and accumulates as you pay the policy premium.

With your authorization, the cash value can also be used to pay premiums, keeping your policy current as your income changes with age. When available, you can also borrow against this cash value for unexpected emergencies, or even to pay medical bills or go on vacation by taking a tax free policy loan against the accumulated policy cash value. Keep in mind that annual loan interest will be applied to any outstanding loan balance, so it’s a good idea to pay it back if you can. The final death benefit will be reduced by any outstanding loans you have taken on the policy and any premium due.

For whole life insurance policies with a higher death benefit, it’s a good idea to consult with a certified financial advisor or wealth expert to see if whole life insurance is aligned with your financial goals.

Like any other type of life insurance, whole life insurance offers the policy owner the opportunity to name any person or organization as the beneficiary of their death benefit. This generally tax-free benefit, paid by the insurance company, can provide financial stability for a family with young children, replace income, or help create a legacy with a donation to a favorite charity or non-profit group.

Some companies offer policies that contain a graded death benefit, where the payout is a percentage of the full face amount or a percentage of premiums paid if the insured passes away in the first couple years of the policy. After coverage has been in effect for several years, the death benefit increases to the full amount.

Whole life insurance policies often come with additional benefits which are referred to as riders or endorsements. These options can sometimes add to the price of the life insurance premiums, but they also provide additional coverage or benefits.

Below is a sampling of some of the riders often available with whole life (and some term) policies. Note that this is not a complete listing of the many possible benefits that can be added to life insurance policies with a rider or an endorsement.

Family income benefit rider

People concerned with how their family will manage financially in the event of their premature death may be interested in purchasing a family income benefit rider. This option provides a monthly benefit amount in addition to a lump sum payment as a death benefit.

Disability waiver of premium

If the policy owner becomes disabled and can no longer work, they can stop making monthly premium payments for their life insurance policy until they can go back to work. This rider, which is also available with some term policies, protects the policy owner from lapsing the policy, and potentially forfeiting the money they’ve paid into their policy so far. It is a worthwhile option to protect their policy in the unexpected instance of a temporary or permanent disability.

Long-term care rider

Long-term care costs are rising steadily, and so are life expectancies. In-home care, nursing home care, and various rehabilitation services aren’t covered by many health insurance policies. They are also expensive—and many people struggle to pay for this type of medical care on their own. A long-term care rider could help cover some of those costs, and is an option worth considering for someone who wants both a life insurance policy and long-term care coverage.

Accelerated death benefit rider

The insured person has the option of accessing a portion of the face value of their life insurance policy if they are diagnosed with a terminal illness. This rider, which is also available with some term policies, is beneficial because it could provide the funds needed to help pay for expensive life-extending care or medications, in addition to day-to-day living expenses that the insured may have. Any money received is typically provided on a tax-free basis via a policy lien which reduces the death benefit paid at the time of the insured’s death.

Travel accident endorsement

With this endorsement, if the insured dies as a result of a qualified travel related accident, the face amount of the policy is increased.

Whole life insurance is a great way to protect your family, legacy, or business if you can afford the lifelong premiums.

Here are some reasons why it might be right for you:

• You want coverage for life
• You’re planning on spending your retirement savings and still want to leave money to loved ones
• You want to manage estate taxes so your beneficiaries don’t have to cut into their inheritance to pay them
• You want to fund a special needs trust to provide lifelong care for a dependent
• You want to equalize inheritance when leaving a business property to only one child

Why whole life insurance might be right for you:

• You’re between 60-85 years old, and looking for a policy to cover your final expenses
• You want the security of a guaranteed issue policy, where you skip the traditional underwriting process and are guaranteed coverage regardless of your health status
• You want a policy with a cash value component that you have the option to access later if needed
• You’re looking for a policy with a lower face amount

Whole life insurance offers a level of certainty that appeals to some customers as well. As long as premiums are paid, whole life policy doesn’t expire or decrease in value, and the death benefit is guaranteed. This provides security and peace of mind that your loved ones will be protected, no matter the circumstances.

However, when considering whole life insurance as an option, it’s important to ensure the monthly premiums are well within your budget. It's not uncommon for policy owners to lapse on their policies within a few years because they can't keep up with the monthly premiums. These policy owners lose out on the benefits of their whole life policies by not allowing the cash value portion of their policy to grow and the death benefit to be paid to their beneficiaries.

Here’s the bottom line: both term and whole life insurance policies have their merits, and each can be a valuable option, depending on the individual. It’s important to evaluate which is best for you and your family from a purely individual perspective. A great way to kickstart the process is to learn which product we can offer you. Please contact us today to get started.