As an alternative to term insurance, there is whole life insurance. Whole life insurance is permanent coverage that lasts your entire life; by contrast, term life insurance only covers you for a specific number of years. It’s also one of the simplest types of permanent coverage. While there are other kinds of permanent coverage, whole life is the simplest because it isn’t purchased in stages and adds a “cash value” component – a life-long financial asset (although some policies may not have a cash value). Policies can include an option for a cost-of-living adjustment rider. When you apply for a policy there’s an underwriting process in which you may undergo a medical exam and will be quoted premiums based on your mortality risk and purchasing decisions. Based on your life expectancy, the insurer’s actuaries set four guaranteed values that are credited annually. These insured values are part of the cash value of the policy, which grows over time as premium payments are added to the account.
A guaranteed level premium: This is guaranteed never to change. As long as you keep paying premiums, the policy will stay in effect.
A guaranteed death benefit: The level of the death benefit (the amount paid to your beneficiaries) is guaranteed never to decrease.
A guaranteed cash value: A cash value that is guaranteed to grow at a set rate each year until it is equal to the face amount of the policy at a specified age, typically age 100 or 121.
A guaranteed endowment: The death benefit is guaranteed to be paid if the insured is still living at the age specified in the contract, typically age 100 or 121. A policy’s cash value can provide numerous benefits that you can use while you’re still alive. It can take time for it to grow into a useful amount, but once that happens, you can borrow money against your policy’s cash value, use it to pay premiums, or even surrender it for cash in retirement.
What are some of the benefits of whole life insurance?
- A permanent estate
- Tax-free death benefit
- Tax-deferred growth
- Tax-favorable access to policy cash values through withdrawals
- Tax-favorable access to loans for any reason
- Self-funding
- Disability protection
- Liability protection
FAQ's
Can you cash out of a whole life insurance policy?
Yes. A whole life policy has cash value that grows over time. You can cash it out to help pay for retirement, or borrow against it at any time, for any reason
What are the pros and cons of whole life insurance?
Whole life insurance is the simplest form of permanent life insurance, with guarantees for the death benefit amount, premium costs, and cash value growth. Compared to universal life (another form of permanent coverage), whole life typically offers more guarantees but less payment flexibility. Compared to term life, whole life offers life-long coverage and cash value; but the cost for a given level of death benefit is typically higher.
What is cash value in whole life insurance?
Whole life policies have a component referred to as the policy’s cash value: A portion of your premium dollars can grow over time on a tax-deferred basis, so you don’t pay taxes on the gains.