Whole Life Insurance: What You Need to Know
Published: 1 February 2012 By MoneyHighStreet Staff Leave a Comment
Whole life insurance is an insurance policy that remains effective for your entire life. While the policy is active, you must pay an annual premium into your plan.
Whole life is arguably the simplest variety of life insurance coverage that you can buy, and its features include protection for life complete with premiums that are guaranteed.
Other perks include a death benefit when you pass away, and most policies have some form of cash value. The only way you are guaranteed to lose coverage is if you stop paying your premiums or if you cancel your policy.
Advantages
The biggest advantage of whole life insurance is that the price of your premium is guaranteed. This means that the cost of your annual premiums will stay the same throughout your lifetime. This is a major plus because if you were to choose a term life insurance policy instead, your rates would steadily raise over time because of health changes and your increasing age.
With a term policy, the life insurance company you choose knows that as you age your chances of dying during the term of your plan increase, so they raise your premiums in tandem. This is a non-issue with whole life policies, because your insurance company locks in your rate when you purchase your plan. Even if you suddenly fall gravely ill, you’re covered, plain and simple. This is truly the biggest advantage of the plan.
Another indirect advantage of whole life insurance is that as the years wear on, the policy surprisingly gets cheaper for you. This is because of one fundamental rule of economics: inflation. As time passes, the cost of living will rise. When you lock in the price of your premiums, then you effectively sidestep inflation, therefore saving money on your whole life insurance plan as it ages.
Disadvantages
To be clear, there are disadvantages of whole life insurance plans. For example, when you opt for the fixed premium of a whole life policy, you will pay much more for premiums during the term, and the cost could keep you from purchasing the amount of coverage that you need. A second disadvantage is that most people don’t actually need their life insurance to last until they are elderly. The idea of life insurance is to provide financial support for your family in the event that you pass away. Once you have retired and you no longer have a family who relies on you for a salary, the need for life insurance dramatically decreases.
If you are taking out a life insurance policy as a form of investment, whole life insurance may not be your best bet. The rate of return that you will receive on the cash value of your whole life investment is usually not high enough to warrant the extra cost. It’s likely that you would see more of a return if you save the money yourself or use other vehicles to grow your savings.
Types
There are several classifications of whole life insurance, but they all fall within a few main categories. The major forms are participating policies, non-participating policies, economic plans, indeterminate premium policies, limited pay plans, and single premium whole life insurance. The types of plans that you are offered vary by state and insurance company. In addition, different rules and laws govern different policies, so make sure to check with your insurance broker to find out what options are available to you before you sign on the dotted line.
Qualification Requirements
In order to qualify for a whole life policy, you need to make sure you meet certain guidelines. For example, when you take out a whole life insurance policy, you need to make sure that you will be able to keep up with the premium payments for the rest of your life.
Sometimes, companies will let you make a bulk payment to take care of your entire premium in one fell swoop. This allows you to get your policy “paid up” so that you do not have to make further payments for the rest of your life. Other plans let you pay your premium in full through a series of bulk payments. Many companies will allow you to pay off your policy in as little as 5 years.
The only caveat to this method of paying for your premium is that you must do it at the beginning of your policy. You cannot pay annual premiums and then change your mind and decide to make a bulk payment for the remainder of the amount you owe.
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