27 Important Things to Know About Whole Life Insurance

Whole life insurance is a type of permanent life insurance that provides coverage for the insured's entire lifetime, as long as premiums are paid. It combines a death benefit with a savings component, known as the cash value, which grows over time on a tax-deferred basis. 

Key aspects to understand include its higher premiums compared to term life insurance, the ability to borrow against the cash value, and the potential for dividends from participating policies. 

Whole life insurance can be a valuable financial tool for estate planning, wealth transfer, and ensuring long-term financial security for beneficiaries.

 

Insurance and Investment

One of the fundamental aspects of whole life insurance is its dual nature: it combines a death benefit with a cash value component. When you pay your premiums, a portion goes towards the insurance protection (death benefit), while another part contributes towards building cash value.

 

Cash Value

The cash value of whole life insurance grows over time, mainly through interest, and can serve as a financial asset. This growth is typically guaranteed at a minimum rate, providing a sense of security and predictability.

 

Policy Loans

You can borrow against the cash value of your whole life insurance policy. This means accessing funds for emergencies, education, or other significant expenses without going through traditional loan processes. However, these loans accrue interest and must be repaid to avoid reducing the death benefit.

 

Guaranteed Death Benefit

A significant benefit of whole life insurance is the guaranteed death benefit. Your beneficiaries receive a predetermined payout upon your passing, tax-free, which can provide significant financial security for your loved ones.

 

Level Premiums

Another appealing factor is the level premiums. Once you agree on a premium amount, it remains the same throughout the life of the policy, making budgeting more straightforward and predictable compared to some other insurance types which may have premiums increasing over time.

 

Dividends

Whole life insurance policies may pay dividends, which are a portion of the insurer’s profits. These can be received as cash, used to reduce future premiums, increase the policy's death benefit, or accumulate additional cash value.

 

Higher Premiums

On the downside, whole life insurance tends to have higher premiums compared to term life insurance. This reflects the long-term coverage and cash value accumulation benefits, which can be a drawback for those on a tight budget.

 

Surrender Value

Another consideration is the surrender value. If you decide to cancel your policy, you receive the cash value minus any surrender charges. However, early surrender can result in a significant loss, especially within the initial years when the surrender charges are highest.

 

Exclusions and Limitations

Whole life insurance policies also have certain exclusions and limitations. For instance, most policies have a two-year contestability period during which the insurer can investigate and deny claims for material misrepresentation.

 

Underwriting Process

Understanding the underwriting process is essential. Most whole life policies require medical underwriting, which involves a health exam to determine eligibility and premium costs. Some no-exam policies are available but tend to be more expensive.

 

Compare Types of Plans

When comparing whole life insurance to other types of insurance, it’s crucial to understand your financial goals. 

For example, if your primary need is temporary coverage (lasting for 30 years or less), term life insurance might be a better fit due to its lower cost.

Review the complete list of 27 important things to know about whole life insurance.