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What are the benefits of obtaining whole life insurance? There are several advantages and considerations to choosing a whole life insurance policy over other types of life insurance policies. While whole life plans do offer certain features over other alternatives, they're not for everyone. Whole life plans are best for those who have a long-term horizon and the means to afford future payments comfortably, ten to twenty years in the future. Otherwise, other types of policies may be more suited to the insured's circumstances.
Pros & Cons of Whole Life Policies
|Lifelong Coverage||Initial Premiums More Expensive|
|Fixed Premiums||Low Initial Returns|
|Cash Value||Unfavorable Early Termination|
|Forced Savings||Investment Uncertainty|
|Flexible Options||More Complexity|
|Certain Death Benefits|
Related Information on Whole Life Insurance Explained here.
Advantages and Benefits of Whole Life Insurance
Lifelong Coverage: As its name implies, whole life insurance policies are designed to provide insurance protection for your whole life (versus term life insurance policies, which only offer protection for a specified period of time).
Fixed Premiums: Premiums for other types of policies usually increase over time to reflect the rising cost of insuring older policyholders. For whole life policies, insurers average the lifetime cost so that you pay a level and predictable premium. Having a fixed premium can be easier for people to budget and plan around.
Cash Value (also known as Cash Accrual, or Cash Surrender Value): One of the distinguishing elements of a whole life insurance policy is "cash value". It means that the premiums you pay towards your policy accumulate in a cash balance that you can use when you are still alive. If you should decide to discontinue paying your premiums, your policy may still be worth something to you (depending on how much cash has accumulated). In contrast, premiums paid for term life insurance, which are pure insurance policies, only pay out upon a death.
Forced Savings: For those who require external encouragement, paying a policy premium forces them to set aside money that can be used at a later date.
Flexible Options: The accrual nature of your premiums offers you several flexible options in the future should you decide to stop paying premiums. You can borrow against the cash balance. Note that there may be a waiting period of up to three years before this option is available, such as in the state of New York. You can also choose to stop paying new premiums, and stretch your existing premiums and accumulated cash value towards a reduced benefit protection.
Dividends: If you have a participating whole life policy, you can receive dividends from your insurer. They're not guaranteed, however, and are only paid out when your insurance company has excess investment earnings, savings on expenses, or favorable mortality statistics. You can pick how you want the dividends to be used: paid out in cash, reduce your premium payments, accumulate interest, or pay for Paid Up Additional insurance (which increases your policy value).
Tax Deferrals: There are tax benefits to whole life insurance policies. The growth of interest in whole life plans is tax-deferred. Additionally, if you have a basic participating whole life policy, any dividends you receive are considered a return on premium. They won't be taxed until your total dividends exceed your total premiums. Any interest accumulated on the dividends will be tax deferred as well.
Certain Death Benefit: Beneficiaries are generally guaranteed a death benefit no matter when the insured dies, so long as the policy is active. This assumes the policy wasn't surrendered, and that payments were continued. In comparison, under term life insurance policies, beneficiaries only receive a death benefit if the insured passes away within the period covered.
Disadvantages and Considerations of Whole Life Insurance
Initial Premiums More Expensive: Generally, the older an insured is, the higher the cost of insuring him or her, and inversely, the younger an insured is, the cheaper the insurance cost. Under a whole life policy, the overall insurance cost is evenly spread across the policy's life, so on average, younger insureds would pay more in premiums. So when you're younger, your premiums will be more expensive for whole life versus term policies, but when you're older, your premiums will be cheaper compared to other plans.
Sample Life Rate Quotes from State Farm: here are a few sample quotes for insureds in good health, no tobacco usage, with $100,000 in coverage in Florida:
- Female, 25 years, estimated quotes of $233 per year under a 30-year term life plan, and $956 per year under a whole life plan
- Male, 35 years, estimated quotes of $313 per year under a 30-year term life plan, and $1,454 per year under a whole life plan
Lower Initial Returns: Higher upfront costs reduce returns in the initial years of your policy. Commissions for agents are front-loaded on your policy, and estimates are that they can make anywhere around 100% of the annual premium, with a single-digit premium in subsequent years. Other administrative and underwriting fees will chip away at your annual premium and thereby lowers your initial return. There are blended policies that combine aspects of whole life and term life policies to maintain the benefits while minimizing costs - ask your insurance agent about this alternative.
Unfavorable Early Policy Termination: Should you choose to cancel your policy in the first few years, the premiums you paid will have gone towards administrative and commission costs, leaving little to no cash value for you. Your policy may also have cancellation fees, depending on the insurance company. Nationwide, for example, does not charge any early termination fees for their fixed and whole life policies.
Investment Uncertainty: As with any kind of investment, it is difficult to ascertain the growth of the cash value portion. The rate of return, while some minimum level may be guaranteed, can't be determined until after funds are invested. Furthermore, your cash value begins accumulating generally after the first year. There is a rider called a Paid Up Addition Rider that structures your policy to accumulate cash value faster. Ask your life insurance agent to see the worst-case scenario, which shows maximum costs and minimum rates to prepare yourself.
More Complexity: The added features and benefits available with a whole life policy do make it more complex than term life insurance.
Long-Term Horizon: Whole life is designed to provide protection for the rest of an insured's life. If there is a chance or possibility that your financial situation may change in the short-term, it is not worthwhile to go with a whole life policy for the reasons above. In this 2012 study by the Society of Actuaries, 14% of policies lapse within the first year alone. By the third year of a whole life policy's life, 30% of policies have lapse or been terminated. Sometime up to the 20th year mark, just a little less than 50% of policies lapse.
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