Life insurance is a type of financial product that represents a long-term contract between the owner of the policy and the life insurance company. In exchange for periodic premium payments, the insurance guarantees that a stated death benefit will be paid to the policy's beneficiary if the insured person dies while the policy is in force. In most circumstances, life insurance death benefits are tax-free to the policy's beneficiary.
Whole Life Insurance Advantages and Disadvantages
There are several types of life insurance, but this article will focus on whole life insurance and whole life insurance pros and cons. What is whole life insurance? Whole life is a type of permanent life insurance - meaning it is intended to remain in force from the time the policy is issued until they die. After a number of years, the policy builds cash value, which grows at a fixed interest rate stated in the policy. This value may be borrowed against for any need that the owner sees fit. If the owner of the policy fails to make timely premium payments, the policy will lapse and the owner will receive the policy's surrender value. The policy's face amount (death benefit) is set at the time the policy is issued, and it generally will not change. Once the insured person dies, the beneficiary receives the face amount - less any unpaid premiums or loans, if there are any.
Let's look at some whole life insurance pros and cons.
- Builds cash value
- Premiums generally do not increase
- Money can be borrowed from the policy
- Earns a fixed rate of interest
- If policy is kept in force, no need for additional medical exams later down the road
- Typically more expensive than term life insurance
- Growth potential is limited when compared to variable universal life insurance (discussed later in this article).
- Face amount usually cannot be changed after issue
- Premiums are level and must be paid on time (within a grace period)
- Full medical underwriting is usually required
Other Types of Life Insurance
Now let's take a look at some of the other types of life insurance that are available to you, in case whole life insurance does not meet the needs you have in your personal situation:
Term Life Insurance
What is term life insurance? It is probably the most common type of life insurance policy. As the name suggests, these policies remain in force only for a certain number of years, and then they expire - even if the insured person is still living. Term insurance is generally less expensive than whole life insurance, and term policies do not build cash value. This type of insurance is usually most suitable for people who have temporary life insurance needs, such as a mortgage that would need to be repaid in the event of their death, or children that need to be provided for until they reach adulthood.
Universal Life Insurance
What is universal life insurance? It is similar to whole life in that it is designed to be a permanent insurance policy, covering a person from the time they purchase the policy until their death. This type of insurance is a bit more flexible than whole life, though. Premium payments, rather than being required on a schedule, may be paid in the amount and frequency that the owner wishes - subject to the limits in the policy. Premium payments may even be skipped for a period if the owner wishes and the cash value is sufficient enough to fund the policy. The face amount is also flexible and may be increased or decreased according to the owner's needs, although this may be subject to medical underwriting. Finally, universal life insurance is usually subject to a cost of insurance charge in addition to premium payments. This amount is added to the policy's cash value.
Variable universal life (VUL) insurance works much in the same way as standard universal life, but instead of earning interest at a fixed rate, the policy's cash value grows according to the performance of an investment account within the policy. The owner allocates the policy's value among investment options known as sub-accounts, which invest in underlying mutual funds. Under this arrangement, the policy's cash value has unlimited growth potential, however, money can be lost due to poor market performance as well. Additionally, VUL policies may be subject to administrative charges from the managers of the sub-accounts, as well as a mortality risk and expense charge to compensate the insurance company for their risk in offering the guaranteed elements of the policy.
Comparing Policy Types
|Policy Type||Cash Value?||Permanent?||Can Lose Money?||Guaranteed Interest Rate||Flexible Premiums?||Flexible Face Amount?||Can Borrow From?||Ability to Lose Money?|
For Whom Might Whole Life Insurance Be a Good Idea?
To sum up, whole life insurance may be a good fit for the person who knows how much of a death benefit their loved ones would need, and are confident that this won't change. It is also for the person who is able to make timely premium payments - and will be able to do so for years or even decades. Whole life can also benefit someone who may have a need for capital in the future and would like to source money from outside the banking system.