Whole life insurance policy, also known as traditional life insurance, provides a death benefit for the insured’s entire life. It is a type of Permanent Life Insurance. Whole life insurance, in addition to paying a death benefit, has a savings component in which cash value can accumulate. Interest is compounded at a fixed rate and is tax-deferred.
How Whole Life Insurance Works?
In exchange for regular, level premium payments, whole life insurance guarantees payment of a death benefit to beneficiaries. Along with the death benefit, the policy includes a savings portion known as the “cash value.” Interest can be accumulated on a tax-deferred basis in the savings component. Growing cash value is an important aspect of whole life insurance.
What Is the Cost of Whole Life Insurance?
Whole life insurance is one of the more expensive ways to purchase life insurance due to the guaranteed features. The cost of whole life insurance varies and is determined by several factors, including age, occupation, and health history. Typically, older applicants outnumber younger applicants. Insureds with a clean medical history typically have lower rates than those with a history of health issues. A policyholder’s premium is also determined by the face amount of coverage; the higher the face amount, the higher the premium. Surprisingly, certain businesses have higher rates than others, regardless of the applicant or their risk profile.
Benefits of Whole Life Insurance
- Coverage is available for the rest of your life.
- Premiums remain unchanged.
- A whole life policy’s cash value grows tax-deferred.
- After a certain point, policyholders can borrow against the cash value of their policies.
Disadvantages of Whole Life Insurance
- It’s more expensive – According to Policygenius data in January 2022, a whole life insurance policy can cost up 5 to 15 times as much as a term life policy for the same death benefit amount.
- Death benefit is reduced – Because whole life insurance is more expensive, whatever amount you spend on insurance will buy you a much lower death benefit than a term policy.
Why buy whole life policy if it is more expensive?
With no expiration date on coverage, the main advantage is its permanence. Buyers are also attracted to the policies’ predictability, as premiums and death benefits remain constant. Don’t forget about the tax advantages: the cash value in a whole life policy grows tax-free.
Who is best suited for Whole life insurance?
Whole life insurance is appropriate for people who want lifelong coverage and are willing to pay for the policy’s guarantees.
