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Whole Life
With a whole life policy (also called permanent insurance), you don't have to worry about possibly outliving your policy term because
your contract gives you coverage for your entire life, as long as the premiums are paid. With a whole life policy, unlike term life, you
also build up "cash value" in the policy that you can tap in the future.
Premiums are significantly higher for permanent insurance than term life due to charges and fees that you don't pay with term life.
Cash value is a crucial selling point for whole life: It's an account within your policy that builds up over time, tax-deferred,
fueled by a portion of your premiums and interest paid by the insurance company. In fact, the whole life contract is designed for
you to take advantage of that money in the future. When you die, your beneficiaries receive the death benefit, not the cash value,
with the exception of some universal life policies.
Whole life policies build up cash value slowly at first but then pick up the pace after several years, when your earnings start to
grow faster than your "mortality" cost (the cost of insuring you). We can show you a few types of policy illustrations.
Whole life could be an attractive option for any of these reasons:
- Others are relying on you for long-term financial support.
- You're worried about outliving a term life policy and being unable to buy further insurance due to age or deteriorating health.
- You want to build up cash value in addition to protecting your beneficiaries.
- You want to create an estate for your beneficiaries after your death.
- Your beneficiaries need the benefit to pay estate taxes on other assets.
Berlin says whole life's advantages are that you don't have to worry about outliving your policy (as is possible with term life) and
there is the "forced savings" component of the cash value account, which grows tax-deferred. Once your cash value is built up, you can
access it for anything — retirement, your child's college tuition or the vacation you've always wanted through withdrawls or loans. Whole
life policies are also eligible to earn dividends (depending on the company) which can be used in a variety of ways, such as providing
paid-up additional life insurance, which increases both the life insurance benefit and policy cash value.
If you decide that a whole life policy is right for you but feel you're currently unable to afford the premiums for the face value
you desire, you should buy as much whole life as you can afford and fill in the balance needed with term life. Later, you can convert
your term life policy to whole life.
For the wealthy with large estates, putting a whole life policy into a trust is a way to pay estate taxes when they die.
If the features of permanent life insurance fit the bill for you, there are several varieties depending on your needs and your
tolerance for financial risk.
Ordinary Whole Life Insurance - Premiums are level as long as you live and your policy builds cash value.
The initial annual cost will be much higher than the same amount of term life insurance, but as you get older that gap closes.
Limited Payment Whole Life Insurance - This policy lets you pay premiums for only a specific period,
such as 20 years or until age 65, but insures you for your whole life. Thus, premium payments will be higher than if payments were
spread out through your lifetime.
Single Premium Whole Life Insurance - This policy is paid up after one substantial initial payment.
Participating or Non-Participating Whole Life Insurance - Any type of whole life policy listed above
could be "participating" or "non-participating." You have a participating policy if your life insurance company pays dividends to
policyholders when it has a good financial year. Dividends are not guaranteed and they will vary year to year when they are paid,
but if you have a participating policy you can take your dividends as cash, use them to pay your premiums or use them to purchase
additional insurance to increase your policy's face value. Dividends are not taxable as long as they don't exceed the premiums you've paid in.
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