A lot of people have a lot of questions when considering getting life insurance. Some common ones are – “do I need life insurance if I don’t have a family?” or “am I too young to get one from Life Insurance Companies?” or “what or how much coverage will I need?’ or “which policy will be the right one for me?” The list goes on and on and on.
As you are weighing your options on different types of life insurance policies, a whole life insurance policy is what you will most likely consider. But, what is whole life insurance? What are its pros and cons? Let’s find out!
What is Whole Life Insurance?
As the name suggests, whole life insurance is coverage for an entire lifetime. In contrast to the term insurance that covers you only for a certain amount of time, it can range up to 10, 20, or 3 years. If you need life insurance after the term ends, you will have to look for a different life insurance quote.
Another big difference between a whole life insurance policy and a term policy is that term policies generally are available for a lesser cost as compared to whole life insurance. This means that you have the option t buy a term policy with a larger death benefit and the money amount remains the same. Hence, it is not surprising that while almost 50% of individual policies account for permanent life insurance, they represent 28 to 30% of its total face amount.
Another reason why whole life insurance is so expensive is that it also has a saving component, also known as the cash value. Once you opt for a whole life insurance policy, a part of your fixed annual premium goes into buying insurance, much like the term insurance policy. Some part of it goes to the reserve account that earns interest and grows gradually over the years. A loan can also be taken against the policy’s cash value or withdraw money if you decide to give up or surrender the policy. On the other hand, is a term policy, there I no cash value, and only pays off if you die.
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What are the Pros of Whole Life Insurance?
Whole life insurance has a lot of potential benefits like –
Predictable premiums
Unlike other types of life insurance, the amount you will be paying or your premiums will remain the same for the entire amount of time you have the policy, no matter what your age is or if there are any changes to your health. Eventually, with some policies even if you are done paying your premiums, your life insurance will continue.
It pays off the benefit
A key benefit of whole life insurance is that it pays off the benefits it promises. As long as you stay in your current policy and pay off the premiums, your policy will definitely reach the death benefit. As compared to a term life insurance policy that ends after a certain amount of time, a whole life insurance policy will pay off no matter when you die.
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It can be an asset
As you keep paying the premiums, a whole life insurance policy builds up the cash over time. Based o our policy, that cash value grows up for a substantial amount of money in the future. Also, once you have it, that money will not decline in the market. That cash value can be used throughout life and can become a key part of your retirement plan.
Tax advantages
A whole life insurance policy comes with a lot of tax benefits. Firstly, the death benefit plan is typically tax-free. Apart from that, the growth of the policy’s cash value is tax-deferred which means that you do not have to pay the taxes on dividends and the money while the policy is in place. While you may own the tax on your earnings if you were to surrender the policy, the tax-deferred growth enables your cash to grow faster. This cash value can be used throughout your life and can become a key aspect of your retirement plan.
It pays off the dividends
The cash value of the whole life insurance grows consistently at a certain rate. If the company that you buy your policy from performs exceptionally well, you will get a dividend. That money can be used to pay off the premium or reinvest in the policy or take it as cash. Hence, if you start buying life insurance policies in your 20s, it will multiply significantly over the years.
What are the Cons of Whole Life Insurance?
With the attractive benefits of the whole life insurance policy, there are some drawbacks that you should be aware of. They are as follows –
It is expensive than a term
Because there is no expiry date for the whole life insurance, it is expensive as compared to term life insurance. Because of that a lot of people buy a mix of term and whole life for getting larger death benefits while also taking the advantage of its additional benefits.
It can be slightly complex than a term
Term insurance is pretty straightforward. You can pay a certain amount of money every month for a certain death benefit. With whole life insurance, the list of considerations is slightly more. Based on your policy, there can be different rates that guarantee growth in the cash value. Also, the way the dividends will be paid out can differ from company to company. This complexity, however, can work to your advantage as it gives you the chance to tailor the whole life insurance policy as per your needs. In order to do so, it is important to work with life insurance companies that you fully trust.
The Bottom Line
Whole life insurance surely has its pros and cons. Whether you should get one or not depends entirely on the individual’s needs. It is slightly expensive than term life insurance, but the benefits it offers are great. Ter, insurance is like renting a house. You pay for getting a place to live in for a certain period of time. When the lease gets over, you have to leave that house. On the other hand, whole life insurance is like buying a home. With each premium you pay, you build up equity in the asset. You pay for the house you get to own.
So, if you want to leave a legacy for your heirs, a whole life insurance policy from life insurance companies will be the right choice for you.
