About Term Insurance
Most people know of term and permanent life insurance policies, but are left to wonder about whole life insurance, a kind of mix of the two. Like term plans, whole life options have set premiums over the course of the contract, which lasts until death instead of a set period, as with permanent plans. In very basic terms, whole life insurance is a term arrangement with the added incentive of a cash value in case of emergencies, making it an investment vehicle, too.
Originally, whole life policies were created because consumers wanted something to show for 20 or 30 years’ worth of paying premiums on term insurance. Companies established plans with higher but stable rates in order to create a cash value available for borrowing against until death or the maturity of the contract when the value equals the death benefit (in most cases, 100 years of age).
One of the main benefits of owning a whole life insurance policy is that it locks in the premiums like a term policy and has the longevity of a permanent policy. As long as the annual or monthly payments are made and the policy is not surrendered, the coverage retains its full force until death. If the individual can afford to purchase the plan at a young age, they will avoid the inevitable rise in rates that occurs as they age and their term life insurance policies expire.
It is possible, too, for dividends to accrue over the life of policy. This is where whole life really sets itself apart from the term plans it originated from. Much like a money market account, there are annual interest returns based on how the policy’s investments performed. These can be used to increase the death benefit or reduce premiums or as a simple refund sent back to the insured. Though there are no guarantees for dividends, it is a nice perk to these types of plans, especially considering the additional cost.
Some choose to make whole life insurance part of their estate planning. Under current law, tax is deferred on the policy, meaning the insured only pays money to the government if it is paid out ahead of time. When the terms are fulfilled and the death benefit is handed over to the beneficiary, it is not subject to income taxes at all. This advantage can be key for people with large and complex estates to divide, as the recipient is named directly in the policy.
Whole life insurance policies can also be used as collateral for loans, depending upon the cash value available. The plan can be added to your assets when talking with banks before securing a loan or negotiated with the insurance company itself, meaning any remaining payments will be deducted from the death benefit. There are often waiting periods before the funds are released, though, sometimes as long as three years.
There are several different types of whole life insurance plans, which vary from state to state based on the laws in place (New York, for example, lists six kinds). These policies are more complex than most, so be sure to consult with a licensed insurance professional to find out what’s best for you. Check with your accountant or financial planner to be certain it fits in with your long-term goals before making any decisions, as well.