What Is Whole Life Insurance?
February 14, 2023
Whole life insurance, also known as permanent life insurance, is intended to last a policyholder’s whole lifetime, hence the name. This is in contrast to term life insurance, which is in force for a specified period of time, or term, such as up to age 65.
Whole life insurance provides a fixed death benefit, and it may be structured to include a savings component. This savings component builds cash value that can be borrowed against or drawn upon. It is a good way to provide money for a trust or assist disabled children in their adulthood after the parents are deceased. It can also help your family fund a business, stay in the home they love and avoid estate tax.
How whole life insurance works
If the whole life policy purchased has a $250,000 death benefit, this is the amount your family will receive when you pass away, regardless of how many years it has been since the policy was purchased. The payout from the policy is not subject to income tax, and your beneficiary can use it any way they desire. You can even fund a trust with the proceeds if you list the trust as your beneficiary.
With most whole life policies, the premium amount and the death benefit remain the same, never increasing or decreasing. If you purchase a policy when you are relatively young, you will pay lower annual premiums than if you wait to purchase the same level of insurance later in life.
Depending on the rules of the whole life policy you purchase, you may be able to borrow against it. Know, however, that you will pay interest on the loan. Such loans are available to the policyholder only. Make sure you understand all restrictions and costs of borrowing against the policy when making your initial purchase, since such a loan would reduce the death benefit if it’s not paid back before the death of the policyholder.
You may be offered riders, or upgrades, to your policy (for a higher premium) to include additional protections. For example, a rider might be available to safeguard the death benefit in the event you are disabled or diagnosed with a critical or terminal illness and are unable to pay the annual premium. Or you may be able to add an accidental death benefit, which provides extra money for your family should you die due to an unexpected accident. Some insurers also offer an additional long-term care benefit that helps pay for nursing or home care. Your financial advisor will talk to you about your options.
Insurance as an investment
Some people secure early-death insurance (such as term life), then purchase both a whole life insurance policy that will last until age 99 or 100, as well as a type of whole life insurance called universal life. Universal life is an investment vehicle that has a death benefit, allows access to the value of the policy through loans or withdrawals, and has some income tax advantages. It also permits flexible payments.
Universal life insurance is typically less expensive than a standard whole life policy. Additionally, the value of the death benefit can grow over time, which it won’t under a standard whole life policy. The policy is structured so that part of your premium pays for the set death benefit and part goes toward building cash value — something you can borrow against or use.
For example, if you have extra disposable money at a certain point in time, you could pay into your universal life account and build up your cash value, saving it to pay on your premium later, when you have less disposable income. Some people pay in heavily while they are working so they can use that built-up store of money to pay premiums during retirement.
A universal life policy is attractive to those who want the flexibility to change their premiums and benefits over the duration of the coverage. You can even change how often you pay your premiums, although, of course, there are restrictions.
Some universal life policies now offer a long-term care component. These policies typically stipulate a death benefit and a monthly amount available for long-term care, such as nursing home or in-home services. These are somewhat complicated policies, but they are increasingly attractive because they both pay for needed services and secure a death benefit if the long-term care component isn’t used.
You can also purchase something called a variable universal life policy. This is life insurance that is linked to the stock market in some way. You can choose how your premiums are invested — in bonds, equities, etc. Their performance will determine how much money is available as a benefit to your beneficiaries or to you for withdrawal. Some of these now also come in the hybrid variety with a long-term care component.
Final expense insurance
For those who have no dependents but want to make sure there is enough money to cover funeral and burial costs, a final expense policy, also called funeral or burial insurance, may be most appealing.
This kind of policy offers a fairly low level of coverage — not usually more than $25,000 — that protects family members from the financial burden of end-of-life needs. It can be used for burial plots, funerals, cremations and the like. Many policies require that payment be made directly to the funeral home. Ask your financial advisor about the benefit details.
Overall, whole life insurance in its various forms provides solid, lifelong coverage that assists your family or other beneficiaries upon your death. With an added long-term care component and flexible payment options, you may find a great combination of financial protection that serves you and your loved ones throughout — and after — your life.