Whole Life Insurance, Term Life Insurance, or Universal Life Insurance…they have their differences & their similarities. Today we will focus on Whole Life Insurance policies.
Out of the entire American population, only 59 percent of people own a form of life insurance.
Having life insurance can give most people peace of mind knowing their families will be taken care of if anything happens to them.
It’s not always easy to decide which type of life insurance is right for you. In this article, we’ll discuss whole life insurance so you can decide if it’s right for you.
Let’s get started.
What is Whole Life Insurance?
Whole life insurance refers to an insurance policy that lasts your entire life. Unlike term life insurance, which only covers during the duration of the term, whole life insurance never expires.
Because whole life insurance never expires, it can also provide people with a cash value after a specified number of years. As long as you continue paying for your premiums, whole life insurance will cover you for the rest of your life.
Differences Between Term and Whole Life Insurance
Although it’s a difficult thing for many to think about, almost everyone wants to leave their loved ones covered in the event of their unexpected death.
People often have to decide between whole and term life insurance. As we already mentioned it, one expires after the term is over and the other one doesn’t.
Most term life insurance policies last between 20 to 30 years. If you die during this time, your beneficiaries will receive the death benefit. However, if you pass away after the policy has ended, they will not receive anything.
Unfortunately, if you buy new term life insurance after your previous one has ended, you will have to pay higher premiums because of your age. Also, if your health has deteriorated and you have an illness, it might be more difficult to get life insurance.
Whole life insurance tends to be a lot more expensive than term life insurance. One of the reasons is you pay more than only the premiums. You’re paying to build a cash value that will add up over time.
Once you’re locked into a whole term life insurance policy, you cannot lose it unless you fail to continue paying for the premiums.
Is a Medical Test Required?
Because you will have whole life insurance for the rest of your life, they want to get an idea of how healthy (or not healthy) you are. You will have to go through a medical exam that records your detailed medical history.
The exam will record basic things such as your weight, medical history, family history, and such. Some might even have you take a blood or urine test.
Depending on what the medical exam reveals, you might deal with higher premiums. For example, someone who is a smoker or former smoker might have a higher monthly payment than someone who doesn’t.
Cash Value for a Rainy Day
As we briefly mentioned, whole life insurance builds value over time. Most life insurance policies build face and cash value. For example, the face value is the amount your beneficiaries receive in the event of your death.
If your whole life insurance policy is $500,000, then your beneficiaries receive that same amount when you pass away.
The cash value, on the other hand, is the money that your insurer will keep in a tax-deferred account. Depending on your policy, some policies even pay dividends.
A few life insurance policies also give you the option to borrow some of the money that has been accumulating in your account. You can borrow the money at a lower interest and without going through credit checks.
The downside to borrowing money from your whole term life insurance policy is that if you pass away before you pay off the loan, your beneficiaries will receive less money.
Some Disadvantages of Whole Life Insurance
Although there are many great things about having a whole life insurance policy, there are also a few disadvantages. For starters, people who have a lower income might be unable to pay for whole life insurance due to their higher premiums.
If you get cash distribution over the course of your life, these will be subject to higher income tax.
At the beginning of the policy, it might seem like the premiums are higher than the benefits you’re getting. For example, term life insurance offers higher benefits and lower premiums but tends to increase after the policy runs out. Whole life will stay the same, but you might not see the benefits right away.
If you surrender your policy in the first 10 years, you will also surrender any of the values that may have accumulated.
Another disadvantage is the cash values that accumulate in your whole life insurance policy are subject to inflation.
Tax Implications of Whole Life Insurance
Of course, the question of taxes always gets raised when talking about monetary benefits. Unfortunately, you cannot deduct whole life insurance premiums from your tax return.
Although this is bad news for many who hope to make the most of their returns. The good news is that when your beneficiaries receive the death benefit, they will not have to pay federal taxes on the money they receive.
However, if your whole term life insurance policy earned extra taxable income, they will have to pay federal taxes.
Who Should Choose Whole Life Insurance?
There’s no right or wrong answer to this question. Anyone can get life insurance at any point in their life to leave their beneficiaries protected.
However, most people start looking for life insurance after a major life event such as marriage or the birth of a child.
Whole life insurance is also a great choice for younger people who want to secure a stable premium that won’t increase over time as they age or their health suffers.
Whole Life Insurance, Is It Right for You?
Now that you know the basics, it’s time you make a decision.
Although some whole life insurance premiums are higher, you will be set for the rest of your life.