If you’ve been thinking about buying a life insurance policy, you have probably heard about both term and whole life insurance. You may have even heard that one type is “better” than the other. So, what is whole life insurance and who should consider buying it?
Let’s take a look at what whole life coverage offers, the people it’s ideal for, and the sorts of things that this type of policy can provide.
What Is Whole Life Insurance?
When you begin shopping around for life insurance, you’ll come across a number of new phrases. One of them will likely be “whole life insurance.”
Whole life is a type of permanent insurance policy (the other type is called universal), which is intended to be the only policy you will carry for the rest of your life. It provides a set coverage amount for a set monthly premium, meaning that you will know what to expect from your policy from day one until the day you die. You don’t have to deal with renewing your policy every decade or two. You won’t have to worry about higher premiums or being unable to get coverage if you get sick or develop a health concern down the line.
Whole life policies brings with them a beneficial cash value component. This means that part of your monthly premiums will go toward an accumulated savings account of sort. This account will grow and earn interest over time. The cash value you build up can be borrowed against, if needed, or used to pay premiums later on in life.
Whole vs Term Life Insurance
There are a few key differences between whole life and term life coverage. Let’s talk about the biggest ones.
The biggest difference between the two types is in their approach to coverage. For instance, term life insurance is meant to cover you for a specific period of time: a term. Terms can be anywhere from a few months to 35 years, depending on your needs.
Whole life coverage, however, is meant to stick with you through the rest of your life. This type of policy is considered permanent – unless you cancel or allow the coverage to lapse, you’ll hold onto this policy until you pass away. This one-and-done approach may be appealing to those who don’t want to worry about shopping around, enduring medical screenings, and keeping track of changing premiums every few years.
If you want to get the most value out of your life insurance – purchasing a bigger coverage amount for a lower monthly premiums – you should purchase a term policy. This type of life insurance is considerably more affordable, making it a good option for those on a budget.
However, there is a downside to term life coverage: your premiums are able (and likely) to fluctuate every time you go to renew your policy. The older you get, the higher your premiums will go. You can also expect to see higher jumps in price if you have developed certain health concerns since your last policy purchase. And if you’ve gotten cancer at any point? You’re unlikely to find an affordable life insurance option that fits your needs, if you can even get approved at all.
Whole life insurance, on the other hand, provides you with fixed premiums throughout the entire length of the policy. When you lock in your coverage, you also lock in your monthly fee. Regardless of your health, new medical conditions, or your age, you will pay the same amount for the first month of coverage as you do for the ten-thousandth.
While you’ll pay more for this type of permanent coverage than you would for a term policy with the same death benefit, you’ll also enjoy an invaluable sense of security. You’ll never worry about having your coverage cancelled or being denied a renewal, and you will always know how much your premiums will be, whether budgeting in your thirties or planning for retirement expenses.
When you reach the end of a term life insurance policy, it simply goes away. Every penny you paid into that coverage is gone if you didn’t pass away. You don’t get a refund for outliving your policy, and the premiums you paid over the last 10, 20, or even 30 years are just gone.
Whole life coverage is much different, though. When you pay your monthly premiums, a portion of that will go toward the actual coverage that you chose. The rest, though? That goes into an accumulated cash value fund, which is one of the biggest selling points of a whole life policy.
The cash value will continue to build over time, even earning interest on the balance. The biggest benefit, though, is that this tax-advantaged account can be leveraged for various needs while you’re still alive.
If you need to borrow from the accumulated cash value, you can. This money is taken out in the form of a loan against the policy, and can used for any number of purposes.
If you need to use the money to pay for college tuition or a life expense, you can. If you want to use the money to supplement your retirement savings, that’s fine, too. Oh, and if you’re in a financial bind and need/want to forego paying for your whole life insurance policy for a few months, you can even use the cash value to pay your premiums.
This is why many people consider whole life policies to be a form of retirement savings. The cash value accumulated is an asset, which can be borrowed against whenever needed. It grows over time, and is tax-deferred.
Don’t think that this is free money, though. The money withdrawn is considered a loan, which you should repay. You don’t have to pay it back; however, any outstanding funds owed will be deducted from your death benefits, should you pass away before repaying the loan.
Term life can provide you with something similar, in the form of a living benefits rider. Not every policy includes this, though, and many times, it’s offered as an optional benefit with an added cost. However, it can provide you with the peace of mind that money is available to you and your family if a terminal illness arises.
With the living benefits rider, you’re able to access a portion of your term policy’s death benefit prior to passing away, if you’re diagnosed with a terminal illness and have a prognosis of 24 months or less. This money can then be used for end-of-life care, final expenses, or to support your household in a difficult time.
However, the living benefits rider is much more limited than the cash value option of a whole life policy. While whole life policies allow you to borrow at any time, for any reason, up to the value accumulated, term policies’ living benefits riders require a terminal diagnosis. Plus, the funds are often limited in use to certain expenses.
Who Should Buy Whole Life?
There are a few reasons that someone might want to choose a whole life policy over the affordable term life coverage.
If you have concerns about developing a medical condition or illness, and don’t want to be at risk of losing future life insurance coverage (or having your premiums skyrocket as a result), whole life might be right for you. This allows you to keep your coverage, no matter your age or health.
If you have loved ones who will depend on you for the rest of their lives, whole life is an excellent idea. While term life coverage is great for the period of time when your children are small or your spouse needs your income before retirement, many people can forgo coverage after that time. If you have a special needs child, spouse with a disability, or someone else who relies on you, your care, or your income, whole life coverage will ensure that they are always protected.
Another reason to choose whole life is if you want the reliability and stability that such a policy can provide. You’ll never have to wonder whether your premiums will change or if you’ll have trouble finding coverage. You can also rest assured that your premiums are building a cash value, rather than simply “renting” a policy for a number of years. This financial safety net might be well-worth the added monthly cost for you.
If you still have questions about term versus whole life coverage, and want to know which type of policy is ideal for your family, give us a call at (844) 755-5327. Our licensed life insurance coaches can talk through your needs to see exactly which kind of coverage is best. Then, we can help you build the perfect policy to ensure your family’s financial security.