Whole Life Insurance
Lifetime protection with tax-free cash value growth for any financial need in life.
What exactly is whole life insurance?
You probably already know you need some form of life insurance to protect your family financially. We’re going to look specifically at whole life insurance and answer some of the biggest questions that we receive: Is whole life insurance a good idea? What are the benefits of whole life? Is whole life insurance an investment?
Whole life insurance is a kind of permanent life insurance policy, meaning it lasts your whole life, that eventually pays out a tax-free sum of cash to your beneficiaries when you die. This differs from term life insurance, the other main kind of life insurance, which covers you for a set period of time and then expires. Aside from the length of coverage, the main difference that defines whole life insurance is that it contains a savings component that builds cash value over over time out of the monthly or yearly premiums you pay. Whole life insurance therefore doubles as a kind of savings account, but one that pays a lump sum to your family if you should die prematurely.
The “cash value” part of whole life policies is a savings account that grows tax free within the contract. This cash value which is funded and gains value by either investment options selected or by dividends paid out to participating whole life plan owners. Dividends are how the insurance companies share their annual pofits with their participating whole life plan owners.
There are three major parts of a whole life policy:
The death benefit is a tax-free chunk of cash paid out by the life insurance company in the event that you die. For example, let’s say you buy a whole life insurance policy with $500,000 in coverage. That $500,000 is the death benefit.
The premium type is how long you will pay for the policy until its fully funded. You have options to pay for 8 years, 20 years or for life.
The dividend options are what you can choose to do with the annual dividends that are paid out each year.
- Enhanced Protection – Purchase additional upfront term coverage
- Paid Up Additions – Purchases additional life insurance units each that compound over time
- On Deposit – Dividends are placed in a side account with the insurance company that you have access to withdrawal freely
- Paid In Cash/Premium Reducation – Dividends are paid out in cash each or can go to reduce the premium each year
How does the savings account part work?
Every year, a certain percentage of your premiums goes into a savings account held by the life insurance company. This contributes to your policy’s “cash value.” The cash value of your account earns interest. This interest is actually a dividend from the life insurance company’s yearly profits. Life insurance companies usually guarantee a certain amount of growth every year. If you think of participating whole life like purchasing and owning a home then you will understand how these contracts work.
Your premiums are going towards paying of the cost of insurance while also building equity inside your contract. Exactly like how your mortgage payments are going towards paying down the cost of your loan while your house builds equity each year. We understand that in the earlier years a big chuck of our mortgage payment is going towards interest, the same rings true with a participating whole life plan. As time goes a bigger portion goes towards the principal and less to interest. With participating whole life as time goes on a larger portions goes towards our cash value account and less towards the cost of insurance.
There are 5 ways to access the cash value in your policy.
- You can withdraw from the cash value
- You can borrow from the cash value
- You can request the dividends in cash
- You can surrender the policy
- You can leverage against the cash value
What’s good about whole life insurance?
Whole life insurance lasts for your entire lifetime. As long as you keep making premium payments, your whole life insurance policy stays in force.
Your premiums typically stay level for your entire lifetime. Most whole life insurance products feature level premiums, which means your insurance company cannot raise prices as you get older or if you get sick.
Some of your premium goes into a tax-deferred savings account with interest. Like all insurance products, your premium goes to the insurance company to help spread out financial risk among a large group of people. However, what makes cash value life insurance products like whole life insurance unique is that some of your premium is being set aside into a savings account, which your life insurance company will deposit dividends into as an interest payment.
You can recapture the money you’ve spent on premiums. Because some of your premium is being put aside into a cash value account, you have the potential to recapture that money. Note that this comes with different options and strategies .
Your money is protected from the stock market. If the stock market tanks, you don’t lose any of your cash value. Because your dividends are vested and you have guaranteed cash value within your contract even if other investments stay stagnant or lose value.
- Outstanding debt, like a mortgage
- Future college costs
- Dependents, including children and aging parents
- End-of-life expenses for yourself
- Any financial cushion your family might need