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Whole life insurance, like term insurance, will pay your beneficiaries a specific amount of money upon your death. The primary difference between term and whole life is that term insurance provides coverage for a set period (10 or 20 years, for instance), while whole life insurance pays its benefit as long as premiums have been paid.
Once whole life coverage has been issued, it cannot be revoked, reduced or cancelled except in cases of non-payment or fraud. This makes whole life insurance appealing because it provides a degree of certainty. The primary advantages of whole life insurance are:
- Protection for life – It doesn’t expire or go down in value.
- Level Premiums – The rate you pay for your policy will never increase.
- Cash Value – A portion of your premium builds cash value which can be borrowed against.
- Guaranteed Death Benefit – The amount your loved ones receive is guaranteed.
Once whole life coverage has been issued, it cannot be revoked, reduced or cancelled except in cases of non-payment or fraud
The decision to purchase whole life insurance rather than term is a personal choice and depends on your finances, age, and coverage goals. The first part of the decision-making process when it comes to choosing between whole life and term is cost. Whole life policies cost significantly more than term policies for the same amount of coverage. Although that cost is guaranteed to remain level, your main concern should be with having adequate coverage when you need it.
The process of deciding whether or not to purchase a whole life policy begins with determining your life insurance needs. The American Institute of Certified Public Accountants 360 Degrees of Financial Literacy website offers a Life Insurance Calculator to help you determine how much coverage you should have.
Whole life policies cost significantly more than term policies for the same amount of coverage
Penny Wise and Pound Foolish
The cost for whole life coverage can be six to eight times more than comparable term coverage making this a real bottom line issue for many insurance consumers. Although cost is a crucial factor, it doesn’t have to present an all-or-nothing scenario. Balancing need with cost can mean purchasing a mix of convertible term and whole life may be your best solution rather than joining the ranks of the 30% of Americans without any life insurance coverage.
According to a study cited by the Life Insurance Settlement Association, overreaching personal budgets are a major reason why enrollees surrender their life insurance policies or allow them to lapse. The benefits of a whole life policy are only benefits as long as you keep the policy. When circumstances are right, the benefits of whole life insurance outweigh the added cost.
The cost for whole life coverage can be six to eight times more than comparable term coverage making this a real bottom line issue for many insurance consumers…[balance] need with cost
Cash value, unlike the death benefit, is one you can use while you’re are alive to borrow against or use to reduce (even eliminate) premiums down the road. The cash value of a whole life policy accumulates at a tax advantage basis, which means the money you withdraw is not taxed until the amount you withdraw exceeds your basis (the amount you have already paid in).
Another tax advantage of this type of policy is the payment of dividends by many insurers. Dividends are generally taxed as gains; in the case of life insurance, however, the IRS treats dividends as a return of premium and they are not taxable.
The cash value of your policy is special in other ways; it can be borrowed against or from the insurer, or used as collateral for a third party loan. Cash value is also shielded from creditors by virtue of the fact that the insurance is ultimately intended to benefit someone other than you — and that protection extends to the cash accumulated in the policy.
The Right Choice
Other factors — such as age and health — may contribute to offsetting the higher cost of whole life versus term. For this reason, each passing year can also mean an increase in premium cost for the same level of coverage. As permanent insurance, the premium at the time of issuance will remain constant for the rest of your life.
The advantage of permanent insurance is that your health at the time the policy is issued will dictate the terms of your insurance for the rest of your life. This factor is particularly relevant once we reach middle age. Knowledge of your family’s medical history is also valuable because it can influence your decision to purchase a policy before any hereditary conditions or ailments begin to affect you.
The Bottom Line
The decision of whether or not to buy whole life insurance (and then determining how much to purchase) should be made with regard to the future of both your financial and physical health. There is no point in acquiring life insurance if it will not support your loved ones when they need it the most.