Whole Life Insurance and Permanent Life Insurance
Whole life insurance, also known as “whole of life” insurance, can be described as a permanent life insurance policy that is guaranteed to stay in effect for the full insured’s life, either paid in premiums, or at maturity, whichever comes first. In some whole life policies, an additional term may be added, which allows the beneficiary to borrow cash from the policy in certain situations, such as to buy a home. The premium for whole life policies remains constant during the life of the policy, and the total amount paid out over time is equal to the face value of the policy, less any applicable reserves. The insured may also make use of the policy as collateral for a loan or as a source of emergency funds.
Most whole life insurance policies have a fixed premium with no adjustable components. The policy can be invested to provide a cash value feature, similar to other variable life policies. Premiums are generally paid monthly, semi-annually, or annually. When the policy matures, the accumulated cash value of the policy converts to a percentage of the current death benefit.
Whole life insurance has two parts: the insurance part and the investment part. The insurance part pays the benefit, while the investment part can earn dividends, return profits, and additional income. Usually, the higher cost of investment arises from the fact that the premium goes up each year, as the stock market grows. Another reason is that when the insured tries to liquidate the policy, it costs more than the value of the policy. One reason whole life insurance has a higher cost is that, initially, there is no guarantee that the premium will stay the same through the term of the policy.
Premiums, or the death benefit, is paid on a monthly basis. One reason whole life insurance policies have a lower monthly premium is that they grow along with the stock market, so premiums do not drop as much as if the death benefit stayed the same. Another reason is that, in most case, if the insured has an interest in his or her cash value, the premiums paid increase as the cash value grows. This type of policy is called a “right-to-call” policy.
With either a term or a whole life insurance policy, the insurance premium can be set to grow at a certain rate. The cash surrender value is the excess of the cash value account over the total cash value account value. The surrender value is usually paid on a yearly basis, semi-annually, quarterly, or monthly basis.
As with any other insurance policy, the choice of which to buy is largely affected by the individual’s health history and life expectancy at the time of purchasing. One reason whole life policy premiums may be higher than other options is because it gives the beneficiary the option to borrow against the policy. Borrowing against the policy gives the beneficiary the ability to pay off the premiums more quickly by simply paying a higher amount each month for a longer period of time. Another reason whole life policies may be higher cost is because they contain features such as variable, specified premiums. Another feature is the ability to borrow against the policy which can be used to reduce the death benefit if there are any significant investments beyond the cash surrender value.
Term insurance is less expensive than whole life policies. However, many people choose term policies for flexibility reasons only. One of the benefits of term insurance is the right to build a cash value that accumulates tax-deferred. If the insured does not qualify for Social Security benefits, the death benefit will provide the family with some financial cushion until it is time to apply for coverage. Some term insurance policies allow the purchase of a policy for up to thirty years.
If you are looking to buy life coverage for the rest of your life, permanent insurance is an excellent choice. A permanent life policy offers the same benefits as a whole life policy at a higher cost. However, permanent insurance policies often have less costly options such as increasing the death benefit and reducing the premiums. Permanent policies are also available to cover dependents after the insured passes away.