Understanding Whole Life Insurance

There are two primary ways we can financially protect our families. The first way is through savings and investment. This can be facilitated through an employer sponsored 401K account or by securing some kind of savings/investment options as an individual. The other way to financially protect our families is through the purchase of a life insurance policy.

Whole Life Insurance

Life insurance is a particularly import product when a family relies heavily on one individual for financial support. There’s an inherent risk a family takes when the breadwinner’s earnings are unprotected by other resources. A substantial insurance policy would be a great way to protect the family upon the untimely death of the breadwinner. At the least, an insurance benefit will give the family an opportunity to adjust the family’s financial structure without suffering financial stress.

There’s two primary types of life policies, term life and whole life. A term life policy requires the policyholder to pay a premium for a set period of time for a specific death benefit. Payment terms are usually 20-25 years after which time the policy is considered paid-in-full while the benefit remains intact until the policyholder’s death.

Whole life is an entirely different animal, which we will discuss below.

Whole Life Insurance FAQs

A whole life policy is a contract between the policyholder and the insurance company. For a set monthly premium amount, the policyholder will make said payments until death. At that time, the insurance company will pay the benefit to the policyholder’s designated beneficiary(s). So far, whole life insurance seems very similar to term life insurance.

With that said, there are differences other than payment requirements. The primary difference is a whole life policy accumulates a cash value over time. For that reason, this type of insurance is more expensive than term life. It’s worth noting that in most cases, the whole life insured’s death benefit will decrease over time, being offset by an increase in the cash value over the same period of time.

While whole life premiums are more expensive, there are in fact two components to the whole life policy structure. There’s the death benefit that’s paid upon the death of the policyholder. The other component is the cash value benefit.

As premiums are paid over the entire term of the whole life policy, a small portion of said monies are set aside as a cash reserve. The amounts sitting in cash reserve are what most people would effectively consider to be a savings of sorts. There is earnings on the cash value portion based on a predetermined insurance rate. It’s also possible that a highly successful insurance company will pay dividends to its whole life policyholders at the direction of the Board of Directors.

As the cash value accumulates, the policyholder has options. They can leave the cash value alone to be paid to beneficiaries upon death. They can also take out cash loans with the cash value set as the collateral for said loan. If there is interest charged on that loan, it is paid right back into the policyholder’s cash value account. Finally, the policyholder can elect to pull out cash after retirement, effectively surrendering the remaining portion of the policy.

There are in fact three different types of whole life policies. The description above closely resembles what happens with a “traditional” whole life policy. If the insured has a large chunk of money, they might opt for a “single premium” whole life policy. That would allow them to make one large upfront payment with no monthly payments while maintaining full policy benefits over the duration of the policy’s life.

The third option is what the industry calls the “interest sensitive” whole life policy. While the policy has all the same features as a traditional policy, the interest paid on the cash value portion of the policy is adjustable. This would be a good option if the policyholder believes interest rates in the future will trend higher than what’s being offered as a fixed rate at the time the whole life policy in put in force.

After reading the information above, the advantages of a whole life policy should be clear. While its the more expensive option, it allows the policyholder to save money and make a small amount of extra earnings while still maintaining life protection for the duration.

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