Life Insurance

Understanding Whole Life Insurance

Jul 12, 2018
Older couple in kitchen looking at phone
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.

There are two main types of life insurance with many sub-groups available. Term life insurance covers the insured person for a set amount of time. If they die while the 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 choose to purchase a new policy if they wish.

Whole life insurance has two parts. It has a life insurance component that pays the policyholder’s beneficiary a death benefit. It also has a savings or investment component that gains value over time. Whole life insurance is more versatile in that the policy owner can eventually take out loans against the cash value of the policy. If they decide they no longer need the insurance, they can surrender the policy back to the insurance company and get the cash value in a lump sum.

Another differentiating factor between whole life insurance and term life insurance is that whole life insurance policy premiums are much higher. Part of the monthly premiums goes toward maintaining the life insurance part of the policy. The other part goes toward the insurance company’s fees and the investment part of the policy.

Like universal life insurance and variable life insurance, whole life insurance has a cash value that changes and increases the longer that the policy owner pays the premiums.

How Much Does Whole Life Insurance Cost?

Compared to term life insurance, whole life insurance is prohibitively expensive. A policy for a 30-year-old male living in New Jersey with a face value of $100,000 would cost about $1,030 per year. Bump the face value up to $500,000 and the premium goes up to $4,800 per year. A one million dollar policy would cost $9,510 per year or $827 per month.

You’ll get a lower rate of return over the life of the policy with this investment option than you would if you simply contribute to an average low-fee mutual fund.

Who Gets The Death Benefit From A Whole Life Insurance Policy

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 tax-free cash, 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.

How To Customize A Whole Life Insurance Policy

Whole life insurance policies come with options called riders. These options add to the price of the life insurance premiums, but they also provide additional coverage.

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 insured person becomes disabled and can no longer work during the time that they own the whole life insurance policy, they can stop making monthly payments until they can go back to work. Without this rider, if the policy owner can’t make the premium payments, they’ll have to let the policy lapse. They may forfeit the money they’ve paid so far and they’ll lose the death benefit associated with the policy. Whole life insurance premiums are expensive, and without this rider, the policy owner risks losing their investment.

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 so expensive that most people can’t pay for this type of medical care on their own. A long-term care rider could help cover those costs.

Accelerated death benefit rider

The insured person has the option of accessing a portion of the face value of their whole life insurance policy if they are diagnosed with a terminal illness. This rider is valuable because it could provide the funds needed to access expensive life-extending care or medications. Any money received reduces the death benefit.

Who Buys Whole Life Insurance

For people with a steady income who don’t have concerns about whether they’ll be able to pay the high premiums, whole life insurance is a trusted way to invest with guaranteed returns. So, regardless of whether the stock market crashes, as long as the premiums are paid, whole life insurance is a safe investment.

Unfortunately, the majority of whole life insurance policies never pay out even though they are permanent. 23% of policy owners abandon their whole life insurance policies before the end of their third year. Another 45% surrender the policy within ten years. These people take a huge loss because their whole life insurance policies don’t have time to mature. High fees frontloaded in the early years of a policy mean that the investment portion of a whole life insurance policy is weak. Over time, as the agent’s commissions and administrative fees are paid, the investment portion of the account increases. In most cases, this takes more than ten years, though.

Here’s the bottom line: for the amount of money it will cost you to pay whole life insurance premiums, you can get an inexpensive term life insurance policy and invest the difference in premium costs. Most people make more money over time investing without the additional fees imposed by the insurance company.

Whole life insurance policy premiums are usually three times more expensive than the same amount of term life insurance. Find out how much you’d pay for a straightforward term life insurance policy now by answering a few quick questions.

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