The biggest benefit of a good life insurance policy is the peace of mind it provides to you and your family. Whole life insurance can do just that. In this post, we’ll dig into the details of whole life insurance, explain how it works, and explore its pros and cons to help you decide if a whole life policy is the right choice for you.
Whole Life Insurance, Explained
A whole life insurance policy provides a permanent death benefit for the policyholder and is the simplest, most common form of a larger group of permanent life insurance products available. In general, a whole life insurance policy has two parts:
- Death benefit – This is the face value of the policy and the amount that will be paid to your beneficiaries if you were to pass away.
- Cash value – This is a separate savings component within the policy that can accumulate interest and grow over time.
How does whole life insurance work?
A whole life policy is one of the most straightforward forms of permanent life insurance. Unlike universal life insurance and other permanent life policies, whole life death benefits and premiums remain fixed over the life of the policy and will never change.
The process of obtaining whole life insurance typically starts with the applicant providing basic information about themselves to the insurer. Depending on the desired amount of coverage, the insurer may also require the applicant to pass a health screening. However, medical exams can be avoided if applicants opt for a special type of whole life insurance called “guaranteed issue whole life,” which accepts applicants regardless of any pre-existing medical conditions.
Once approved, the first premium payment activates the policy. With a whole life policy, a portion of each premium payment is applied to the policy’s cash value. The cash value accumulates over time and earns a fixed rate of interest from the insurer.
The longer the policy is in effect, the greater potential for the cash value to grow over time. This saving vehicle can offer the policyholder unique financial opportunities in the future.
How do whole life insurance payouts work?
If you were to pass away while your policy was in good standing, your beneficiaries will receive your policy’s stated death benefit (minus any funds that have been borrowed against the policy). It’s important to note that the IRS considers whole life death benefits as tax-free income – meaning your beneficiaries will not have to pay any taxes on the lump sum payout. The policy’s remaining cash value, however, belongs to the insurer.
Does whole life insurance expire?
As the name implies, whole life insurance is good for your “whole” natural life. As long as premiums are up to date every month, your policy will be considered active throughout your lifetime.
There are, however, some caveats. Some policies state that the death benefit is no longer applicable between ages 100 and 120 (so, realistically, for anyone 100 years old or older). Although the chances of someone living this long are small, it’s a good reminder to make sure your whole life policy doesn’t come with an expiration date.
Average Whole Life Insurance Cost
Although actual whole life insurance costs will vary, a typical non-smoker could expect to pay the following for a new whole life insurance policy:
- 30-year-old $4,300 – $5,000 per year
- 50-year-old $9,800 – $11,300 per year
Of course, the actual cost of a whole life policy will vary depending on a wide range of personal factors, including:
- Age
- Gender
- Health status
- Smoker/non-smoker
- Occupation
How is whole life different from term life?
Whole life is different from term life insurance in three main ways.
- A whole life policy provides permanent coverage for the rest of the policy owner’s natural life, whereas a term policy expires after a pre-set number of years. Someone with a term policy who wishes to renew would have to reapply and possibly pass another health screening. This may be challenging if their health situation has changed over the years.
- Whole life insurance has a cash value component that can grow over time. Term life does not have a cash value component and provides only a death benefit.
- A term life policy will initially be cheaper than a whole life policy because of its limited coverage and no cash value. However, as an applicant becomes older, the cost of a new or renewed term life policy becomes more and more expensive. At some point, it may even cost more than a whole life policy.
Whole Life Insurance Pros and Cons
There are several benefits of whole life insurance that can make it more attractive than other types of permanent life or term life policies. Some factors may be a higher priority for you than others, depending on which stage of life you’re in.
Whole Life Pros
Coverage is Permanent
Once you’re approved for whole life insurance, you’ll never have to worry about a change in health affecting your coverage. This is a huge advantage over a term policy where renewal can be challenging if you’re experiencing new medical issues. Additionally, there are whole life insurance no medical exam policies where you can skip the health screening and buy permanent coverage immediately.
Premiums are Predictable
Since the death benefit never changes with a whole life insurance policy, your payments will always be the same. This can be a huge benefit over other types of life insurance policies where the premiums may fluctuate or increase when renewed.
Whole Life Insurance Cash Value
The cash value component of a whole life insurance policy can be extremely beneficial. It provides a mechanism for policy owners to build tax-sheltered savings that can be borrowed against and used later on in life for things like fixing up the house or sending the kids to college. In some instances, the cash value can be used to pay premiums, making the policy self-sustainable.
Potential Dividend Payments
Many whole life insurance providers will make dividend payments to policyholders. These dividends can be received as income or they can be reinvested back into the policy’s cash value for increased growth.
Whole Life Cons
Whole Life Insurance Cost
Since whole life insurance guarantees a death benefit and pays a fixed interest rate on the cash value, it is one of the most expensive life insurance products available. This is true not only when compared to term policies but also to other types of permanent life insurance.
Cash Value Grows Slowly
Because the cash value inside a term policy grows at a relatively small interest rate, it does not have the ability to grow as quickly or as large as it could with other permanent life plans. For instance, a variable universal or indexed universal policy invests in the stock market, which can allow the cash value to grow significantly in comparison.
Complexity
Although whole life is the most straightforward permanent life policy available, the inclusion of a cash value component makes it more a complex plan than a term life policy.
Is whole life insurance worth it?
While whole life may not be for everyone, many people would benefit from whole life coverage. A few examples include:
- Someone who wants guaranteed coverage for life
- Someone who wants to build tax-sheltered savings
- Someone who wants to borrow against their policy’s cash value
- Someone who wants both of these things but would also like the opportunity to skip a medical exam through guaranteed issue whole life insurance
Ultimately, choosing whole life insurance depends on your personal priorities and budget. If you’re interested in learning more about whole life insurance and how it might benefit you, TDK Life’s independent insurance brokers are here to help. Our expert insurance advisors make it quick and easy to explore your coverage options with no required medical exams and same-day policy options that fit your life and your budget.
