Whole Life Insurance
Whole Life Insurance is a plan that lasts the entirety of the policy holder’s lifespan. Whole Life Insurance is often considered an investment as well as an insurance product. The investment portion of the contract can be considered a savings utility because it accrues a cash value. Whole Life Insurance also has a beneficiary who receives payment upon the death of the policy holder. Unlike Term Life Insurance where you initially begin with a lower premium cost, Whole Life Insurance requires a larger up front cost, but these costs never go up with age as they do with Term Life Insurance. The advantage of Whole Life Insurance is that you can safely plan, whereas Term Life Insurance makes planning more difficult due to holding the weight of its costs in the tail end of its coverage.
Next, it is important to understand the savings component of a Whole Life Insurance plan because this is where the plan holds its added value. The savings component is an accrual of cash value through the policy holder’s premiums. Paying a higher premium usually just increases the death benefit portion of the plan. The savings component should have a predetermined interest that is guaranteed by the insurer. One huge advantage of the savings component is that your money grows in interest and is tax free, whereas with an IRA or 401K plan you only defer this tax break until a later time. Another aspect of a Whole Life Insurance plan, which is held tax free, is the dividends paid out by the Insurer.
Due to the valuable nature of a Whole Life Insurance plan, borrowing against your policy is commonly done. This type of borrowing does have an interest rate but it usually competes fairly with regular bank rates. The money borrowed is taken out tax free which creates a retirement opportunity for those in the higher tax brackets. The opportunity is created because the tax break on the loan outweighs the interest rate paid to acquire the loan.
Although Whole Life Insurance plans have many advantages for those who carefully plan there can raise issues for those who must surrender or borrow early in their plan. Surrendering during the surrender period, which is the first five to ten years of the plan, requires a percentage of the policies worth be paid out. Additionally, borrowing against your policy usually is not possible until a few years into the plan; this occurs because it takes around the same amount of time for your policy’s cash value to accrue.
Thus, we can see there are many advantages and disadvantages in purchasing Whole Life Insurance. It is important to consult Life Insurance Pro to determine if you have the ability to mitigate the disadvantages and fully make use of the advantages.