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Whole life insurance

Whole life insurance

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What is whole life insurance and how does it compare a term life policy?

As the name suggests, whole life insurance is designed to last your entire life. It’s one of the most popular types of coverage taken out by Americans. Policies are generally used to serve multiple purposes — to provide a death benefit and grow in cash value to add to your savings for retirement years.

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    How does whole life insurance work?

    Whole life insurance provides coverage for life and often contains a tax-deferred investment component — sometimes referred to as “cash value.” Your insurer puts a portion of your whole life premium in an investment account, using the rest to fund your insurance coverage. This option can provide money if you terminate your policy or access the cash value you’ve accumulated, as long as you wait out any imposed maturity period.

    What’s notable about this type of policy is that there’s a guaranteed or variable rate of return that will earn a specified amount of interest.

    How much does whole life insurance cost?

    Like any type of life insurance, the cost of whole life insurance encompasses many factors dealing with your health. The price of your premiums will also be dependent on the level of coverage you want applied to your policy.

    Premiums can be paid monthly, bi-annualy or annually — the cost is typically discounted if they’re paid annually.

    Are whole life premiums tax deductible?

    The IRS states that premiums paid for whole life insurance are not tax deductible.


    What are the pros and cons of whole life insurance?

    Whole life insurance policies present a number of benefits and drawbacks to owners.

    Pros

    • Peace of mind of having a lifelong protection.
    • Often used as mandatory savings.
    • Access to cash when your circumstances change.
    • Premium remains the same throughout the life of the policy.
    • Guaranteed death benefit.
    • Your cash value portion will continue to grow each year with guaranteed interest earnings.
    • Possible dividend earnings, which can be used to increase your cash value, reduce premiums, or withdrawn.
    • Can be used to save money to fund your retirement.

    Cons

    • Premiums are much higher compared to term life insurance.
    • Not as flexible coverage needs to increased or decreased.
    • Coverage doesn’t keep up with inflation, which puts your beneficiaries at risk of underinsurance at the time of claim.
    • Poor investment choice as the interest you earn on the cash value may be lesser than other available investment alternatives.

    It’s important to note that whole life insurance policies can have expiration dates. Some policies expire when the insured turns 100 or 121 years old. If this is the case, the policy would expire, but your cash value would still be payable.


    What’s the difference between whole life and term life insurance?

    Similar to whole life insurance, term life coverage provides a lump sum death benefit in the event that the policyholder passes away while the policy is still active. There are some notable differences between whole life and term life insurance. These include:

    Whole life insuranceTerm life insurance
    CostMore expensive, due to the investment portion of the policy.More cost-effective.
    Length of coverageCoverage for your entire life, provided that premiums are paid.Remains active for the term selected by policy owner at time of application. This can usually be renewed into the future.
    FlexibilityNot so much — you can’t change your coverage amount when your needs change.Very flexible — you can apply to increase your coverage typically without having to provide further medical evidence.
    Features and benefitsThe cash value component allows you to borrow funds when required, used as a collateral against a loanGreater range of features and benefits — you can also link term life with other types of life insurance to cover temporary and permanent disability.

    Learn more about whole life versus term life insurance

    Financial advisers will often recommend term life insurance for insurance purposes and suggest that you find other ways to invest the remainder of your money. However, this depends on how much money you have available for investment purposes and whether you have the capital available to take advantage of the most profitable investments.


    Bottom line

    Life insurance is a serious matter, so it’s important that you give it the proper attention. When you know about all of the different policies on the market, you can narrow down which one will work best for your situation. To get the most competitive rates possible with the most flexible policy, reach out to a few choice providers and get quotes to see who can offer you the best deal.

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    Richard Laycock

    Richard is the Insurance Editor at finder, and has been wrangling insurance Product Disclosure Statements for the last 4 years. When he’s not helping Aussies make sense of the fine print, he can be found testing the quality of Aperol Spritzes in his new found home of New York. Richard studied Journalism at Macquarie University and The Missouri School of Journalism, and has a Tier 1 certification in General Advice for Life Insurance. He has also been published in CSO Australia and Dynamic Business.

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