Whole life insurance is a type of coverage that stays in place for the entire lifetime of the person insured. The premium remains the same throughout your life. The insurance doesn't expire and it cannot be taken away. This type of policy differs from term life insurance and you should carefully consider the whole life insurance pros and cons when deciding if it is the best type of insurance for you.
How Does Whole Life Insurance work?
The premium for a whole life insurance policy goes to pay two pieces, the death benefit and the cash value.
Death Benefit. This is the value to be paid out by the policy when the insured passes away. It is a guaranteed benefit once the policy is issue, no matter what happens to your health or how long you live.
Cash Value. The remainder of the regular premium payments goes into an account known as the cash value. This account will earn a minimum interest rate, but may earn something much higher as well.
Once the cash value account reaches a certain level the policy is considered "paid up", which means that the insured will no longer have to make regular premium payments. The policy will provide no additional maintenance and will payout the death benefit when the insured passes.
Common Types of Whole Life Insurance
Non-Participating. This policy is fairly common. All the terms including the death benefit and premiums are established when the policy is issued and usually cannot be altered.
Participating. With a participating policy, the insurance company shares excess profits the firms makes with the policyholders.
Single Premium. Rather than making regular premium payments, the entire amount is paid upfront with a single payment.
Whole Life Insurance Pros and Cons
Guaranteed Benefit. The face value of the death benefit when the insured passes is guaranteed.
Cash Value Benefit. In addition to benefit of the cash value already discussed, it can always be borrowed against if needed.
Steady Premiums. Unlike term life programs, whole life premiums are the same throughout the insured's lifetime.
The Not So Good
Expensive. Because the premium has two pieces, whole life insurance is generally more expensive than other types of life insurance.
Inflexible. Plans can't be adjusted later down the road. The policy that is established today cannot be changed for any reason later on.
No control over investment. The cash value amount contributed earns a return as a result of the insurance company investing the money, however it is entirely subject to how well the insurance company invests the funds.