Whether you are simply starting to research life insurance or are confused about the differences here are the facts about whole life insurance to help bring clarity.
What is permanent life insurance?
Permanent life insurance is a category of life insurance that includes whole, universal, variable universal, and indexed universal life insurance. Each one is slightly different however the most common type is whole life.
The name “whole life” is in place because it is intended to last the entire lifetime of an insured’s life to guarantee a benefit when they pass and offers benefits while alive as well.
Here are the basic facts about whole life policies:
- Provides coverage that lasts your whole life without needing renewal so long as premiums are paid.
- A portion of the premiums goes towards cash value accumulation that can be accessed while alive.
- Lastly, the premiums are usually level and don’t go up over time.
- Predictable, positive, and safe cash value and death benefit growth. With certain riders and choices, they can be increased even more by maximizing the cash value and potential dividends.
- Tax-deferred cash value growth, possibly tax-free depending on distribution choice.
Premium options
Single premium
The highest cost up front is to do a single premium payment option which requires a one-time lump sum payment that makes the policy paid in full. This is generally used more for investment purposes giving it an immediate cash value and loan value available.
Level Premium
Standard or ordinary whole life has a level death and premium for the duration of the policy. Typically this means payments are required up to age 80 or even 121 depending on the policy.
Limited pay
One of the best ways to reduce the number of years premiums are to be paid and to increase cash values the fastest is to do a 10, 15, or 20-year pay option. This essentially means that all premiums required to make the policy paid up will be met in the specified time.
What happens if you can’t pay
Typically speaking most whole-life policies have a provision that will take the cash value and convert that policy over to a term policy for a number of years that the cash value would purchase. In addition, you can get a disability or waiver of premium rider that will pay the premiums in the event of disability as long as circumstances meet the description of the rider.
What can be done with cash value
Think of the cash value that accumulates in a whole life policy sort of like a savings account. In that it is YOUR money, you own it. If you decide you want to take money out of it then you have that option to do so.
Loans from a whole life policy go against the cash value rather than directly out of it, meaning that the full cash value amount you have will continue earning interest and gaining possible dividend growth if you choose that. HOWEVER, if you pass away, the loan is subtracted from the death benefit, but you already received that amount anyway so it’s not a negative.
You have the option also of how to repay yourself that loan against your cash value and in doing so you can actually increase the total available cash value. This is how companies and investors maximize, velocitize, or speed up (whatever term you wish to use that describes putting your money to work for yourself) the growth of your cash value growth.
Participating and nonparticipating policies
A participating policy is from a company that pays its policyholders a portion of the profits they earned for the year. They are not guaranteed but most companies have done so for decades if not over a hundred years, even during the great depression. These dividends are considered a return on premium so they are not taxable and you can receive them in a number of ways: cash, reduce premiums, accumulate at interest, purchase paid-up additional insurance(this is what I meant by choices to increase death benefit also called the face amount).
Non-participating policies obviously do not share in excess dividend earnings though they still have level death and premium amounts for the length of coverage chosen.
Why does whole life have cash value?
Cash value serves to benefit both the insurance company as well as the insured. Insurance companies found that having a cash value component helped them to maintain level premiums. If they didn’t have cash value then the premium itself would not be sufficient to maintain the policy with the increasing cost or risks of mortality. Put simply the cash value is a reserve that helps the insurance company guarantee the death benefit in later years as well as the cash value in the early years(this is a simplified explanation for a basic concept don’t nitpick).
Options to consider instead of lapsing coverage
It’s estimated that only 1-2% of term policies pay a benefit, and even permanent policies are known to not pay due to nonpayment causing a lapse of coverage. Some companies, mentioned above, will convert it to a term policy however there are other options that can be chosen. Here are some other things that you can do with your life insurance instead of letting it lapse.
Life settlement
Those over 70 have the option of selling their policy to an investor for more than its surrender value, though less than the death benefit. The life settlement provider then keeps paying the premiums, collecting the death benefit at the appropriate time. It varies how much you can receive based on life expectancy and other factors but it can be a great option depending on your situation.
Convert from term to permanent insurance
Not only can whole life be converted to term if it lapses but some term policies have the option of being converted into permanent whole life insurance as well. Sometimes the cost of term insurance later in life is prohibitively expensive and conversion to whole life can help you maintain coverage at a more affordable premium.
Assignment as a gift
The assignment allows a policy owner to give ownership over to someone else or even an entity like a charity or company. They then become responsible for premium payments.
Convert life insurance to long-term care
Depending on the resources available this may be a good way for an elderly individual to have long-term care paid for. You make a sale of the life insurance policy to a third party in exchange they are to making payments to the long-term care facility be it assisted living, home care provider, or whatever is worked out.
Accelerated death benefit
In the sad event that you get diagnosed with a terminal illness, you can use this benefit option to get a portion of the death benefit prior to passing away. Usually, it has to be something that will be terminal in 12 months or less.
If you’ve ever wondered what happens when someone dies without life insurance check here
Whole life insurance summary
To summarize whole life insurance simply put has level death and premium values with living benefits specifically cash value growth that can be used in a number of ways for your financial goals. Deciding what to do is always very personal so let us help you figure out what works for you.