Whole Life Insurance

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What is whole life insurance?

Whole life insurance (also called “traditional whole life insurance”) is the simplest form of permanent life insurance.

Traditional whole life insurance distinguishes itself from other permanent insurance primarily through the guarantees that it provides: the size of your death benefit and rate of cash value growth are guaranteed in your contract.  Likewise, the premiums are unchanging from start to finish.

Whole life policies are designed to mature (usually when the insured reaches 100 years of age).  Upon maturation, the death benefit is paid, and the policy terminates.  This means that whole life policies may not actually continue for a lifetime, but they are guaranteed to pay a death benefit.

Cash value

All permanent life insurance policies include a cash value account, which can be treated as a liquid financial asset for a variety of uses.

In traditional whole life insurance, your cash value grows at a guaranteed rate.  (There is no variable “current rate” of interest.)  Therefore, your cash value is guaranteed to be a certain amount at any given time.

Whole Life Insurance is permanent life insurance protection for your entire life, usually to age 100. A Whole Life policy is contractually guaranteed not to lapse, provided that you pay sufficient premiums each year to keep the policy in force. Besides permanent lifetime insurance protection, Whole Life Insurance features a savings element that allows you to build cash value on a tax-deferred basis. A portion of the premiums you pay build up the savings element of the policy and are invested by the company. The interest rate return on your investment is added to the savings portion of the policy. This is how the policy builds cash value. In addition to crediting your policy with interest, “participating” policies issued by mutual insurance companies may also give you the opportunity to earn dividends. Dividends are a NON-guaranteed return of part of the premium intended to reflect a company’s favorable operating experience.

Pros:

Whole Life Insurance has a savings element (cash value) which grows tax-deferred. If the contract is set up properly in advance, you might build up enough cash value to stop paying premiums by a certain age, or to borrow from the cash value (take a policy loan) during your lifetime on a tax-advantaged basis. Unlike Term Life Insurance, whose premiums eventually rise after the initial guarantee period, Whole Life Insurance premiums will not increase during your lifetime (as long as you pay the planned amount and repay any policy loans).Cons:

You are not allowed to choose separate investment accounts, i.e., money market, stock or bond funds; the insurance company controls how and where your premium dollars are invested. Whole Life Insurance offers no premium flexibility or face amount flexibility; the plan you buy today remains fixed for life. It is therefore important to plan carefully, because Whole Life Insurance is not very good at adapting to insurance and/or retirement plans that change significantly.

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