Whole life insurance offers lifelong coverage for the insured individual. Besides delivering a tax-free death benefit, it also includes a savings element where cash value can build up over time. The interest on this cash value grows on a tax-deferred basis.
It is a type of permanent life insurance that provides coverage for your entire lifetime. Other options in this category include universal life, indexed universal life, and variable universal life. To find the right policy for your needs, it’s helpful to compare offerings from the top whole life insurance providers.
How It Works?
Whole life insurance ensures that a death benefit is paid to beneficiaries in return for consistent, fixed premium payments. This type of policy also features a savings element known as “cash value,” which works alongside the death benefit. The cash value can earn interest on a tax-deferred basis, making it a vital aspect of whole life insurance.
To increase cash value, policyholders frequently have the option to make payments that exceed the regular premium, allowing them to acquire additional coverage, referred to as paid-up additions (PUA). Additionally, policy dividends can be reinvested into the cash value, where they can accumulate interest. As time goes on, the dividends and interest generated from the policy’s cash value can yield a favorable return for investors, ultimately surpassing the total premiums contributed to the policy.
The cash value provides a living benefit for the policyholder, allowing them to tap into it while the insured is still living. To access these cash reserves, the policyholder can either request a withdrawal or take out a loan. Withdrawals are tax-free as long as they do not exceed the total amount of premiums paid.
Interest on policy loans is applied at rates that differ among insurers, but typically, these rates are lower than those associated with personal loans or home equity loans.
Withdrawals and outstanding loans can decrease the cash value of the policy. Depending on the type of policy and how much cash value is left, a withdrawal might diminish the death benefit or potentially eliminate it altogether.
Types of Whole Life Insurance
There are a few primary categories of it, which are classified according to the method of premium payment.
- Level Payment
- Single Premium
- Limited Payment
- Modified Whole Life Insurance
Conclusion
It typically features a consistent premium and death benefit, ensuring a guaranteed payout upon the insured’s passing, no matter when it occurs. A portion of the premiums you pay contributes to a savings element called cash value. This cash value is invested with a guaranteed return, and once it accumulates sufficiently, you can borrow against it or withdraw funds tax-free.
The lifelong coverage provided by whole life insurance (as long as premiums are maintained) presents distinct benefits compared to term life insurance, which only provides a payout if death happens within a designated period. However, it’s important to note that whole life insurance comes with considerably higher costs.