The main purpose of life insurance is to provide for your loved ones when you die. Whole life insurance does that, and also becomes a cash asset over time. But it might be years before you’ll be able to make the most of its living benefits.
Advantages of whole life insurance
These are the main perks of taking out a whole life insurance policy:
It provides lifelong protection. Unlike term life, whole life insurance lasts a lifetime.
It accumulates cash value. Whenever you pay a premium, part of it goes toward the cash value portion of your policy — which grows on a tax-deferred basis. Once you’ve built up enough cash value, you can borrow against your policy. The interest rates are typically low, and you won’t be taxed. In this way, whole life insurance functions as an emergency savings account.
It has a minimum rate of return. Even if the market dips, the cash value of your policy will still earn the guaranteed interest rate set by your insurer. Since it’s not subject to the ups and downs of the market, whole life insurance can be a solid investment.
It offers a financial safety net for you and your beneficiaries. During your lifetime, you can take advantage of ‘living benefits,’ such as the ability to take out tax-free loans against your policy to pay for large expenses or fund your retirement. And when you die, your beneficiaries will receive a guaranteed death benefit.
It has predictable premiums. With whole life, the premiums stay the same, so you know exactly how much you’ll pay each month.
It has the potential to earn dividends. If you’re with a mutual life insurance company, you might earn dividends based on their profits. You can then cash in the money, use it to pay your premiums or boost the cash value of your policy.
It can unlock a range of riders. Depending on your provider, you might be able to dress up your policy with a longer list of riders, such as a term and long-term care rider.
It can help with estate planning. If you’ve built up a large estate, you can use a whole life insurance policy to set up a trust — and leave your heirs the funds they need to pay estate taxes. The IRS doesn’t consider death benefits as taxable income. So generally, this money isn’t taxed. Likewise, if you have a child with special needs, a whole life policy can also fund a special needs trust to pay for your child’s care when you’re gone.
Disadvantages of whole life insurance
Like all insurance products, whole life insurance has its downsides:
It’s expensive. Since permanent policies offer lifelong coverage, they come with a significantly higher price tag. Whole life typically costs 5 to 10 times more than term life insurance.
It’s not as flexible as other permanent policies.Unlike universal life insurance, for example, you can’t increase or decrease your coverage if your circumstances change. You can’t adjust your premiums, either. If you foresee income fluctuations, you might want to explore a universal life insurance policy.
It can take a long time to build cash value. In the first few years, most of your premium pays for the insurer’s fees and commissions, and a small percentage goes toward your cash value. This means it might take 10 to 15 years to accumulate the cash value you need to start taking out loans against your policy.
Its loans are subject to interest. If you decide to borrow against your policy, your insurer will charge you interest. And if you don’t pay it back before you die, they’ll reduce the death benefit and your beneficiaries will receive less money.
It’s not always the best investment choice. Depending on the market, the interest you earn on the cash value might be less than what you could get with other investments.
Who is most likely to be researching whole life insurance?
Finder data suggests that men aged 35-44 are most likely to be researching this topic.
Response
Male (%)
Female (%)
65+
3.28%
3.85%
55-64
6.67%
6.93%
45-54
8.18%
7.66%
35-44
14.84%
11.61%
25-34
14.17%
9.01%
18-24
8.07%
5.73%
Source: Finder sample of 1,920 visitors using demographics data from Google Analytics
Myths about whole life insurance
These are some of the most common myths about whole life insurance.
It’s a great way to diversify your investment portfolio. While whole life insurance has an investment component — the cash value — it’s primarily a life insurance product. Each insurer sets a minimum rate of return on the cash value, which typically floats between 2% and 2.5%. If aggressive investing is your goal, you may want to look into other investment vehicles.
It’s perfect for retirement planning. Sure, you can dip into the cash value portion of your whole life policy to fund your retirement. But it shouldn’t be your only source of cash. To plan for a comfortable retirement, it’s a good idea to funnel more of your savings into your 401(k) and IRA accounts.
It only pays out when the policyholder dies. With many providers, you can opt into riders that will let you withdraw money from your policy in certain situations. For example, if you’re diagnosed with a terminal illness, an accelerated death benefit rider allows you to cash in part or all of your policy to pay for your medical expenses. Similarly, a chronic illness rider steps in if you develop a serious health condition. When you die, your insurer will deduct any withdrawals you made from the death benefit.
The beneficiary receives the death benefit, plus the policy’s cash value. This is where whole life insurance gets complicated. Most insurers have a use-it-or-lose-it attitude toward cash value. If you don’t withdraw it during your lifetime, it goes back to the insurer when you die. That said, some insurers offer a death benefit along with an added cash value benefit.
The premiums will rise as you get older. When you purchase a whole life policy, your premium is locked in for life. This means you’ll pay the same amount every month, even if your health starts to decline. To score the best possible premium, you’ll want to apply for coverage as soon as you know you need it. Insurers reserve their top rates for young, healthy applicants.
You can’t borrow against your whole life policy. Once you’ve accumulated enough cash value, you can borrow against your policy. You can use that money for any reason, and you won’t be penalized for withdrawing it before a certain age like you would with a 401(k). But remember that if you die before you’ve paid back the money, your insurance company will reduce the death benefit.
The advantages for permanent life insurance include having coverage that can last your entire life, as well as the accumulated cash value that is guaranteed to grow over time. As for disadvantages, it’s more expensive than term insurance and doesn’t offer immediate access to the cash value. It does take several years of paying premiums for accumulated value to grow to an amount you’d want to use.
Look at purchasing a permanent life insurance policy like buying a home.
When you first buy a home, you typically don’t have equity available right away. It’ll take a few years to build it up. Many times people want to purchase a home because they want to put their dollars towards something where they will have ownership and equity. This is very similar to permanent life insurance. The insured has life insurance but also has the opportunity to build cash value.
What advice would you give to someone considering a whole life policy?
Make sure you work with a financial representative or advisor who can review the policy with you, check you have enough coverage, and show you how the policy works and how your accumulated value will grow over time.
In addition, ask your financial advisor what the growth is based on. It’s important to discuss all the intricacies of your policy so you can get a good idea of what the cash value could look like over time.
Ask an expert: What are the main pros and cons of whole life insurance?
Duncan France Licensed life insurance agent with State Farm
The most obvious advantage of whole life insurance is the fact that you will have life insurance that is guaranteed to pay out as long as you continue to pay the premiums. These policies are also considered as an asset when determining your net worth on a personal financial statement, and accumulate cash value you can draw from in the form of a loan.
The only disadvantage would be price, as they are typically the most expensive policies (aside from specific universal life policies).
What is the one piece of advice you’d give someone who is considering a whole life policy?
Budget, budget, budget! Remember, you are going to be paying for this policy for your entire life. So, make sure it’s something you can afford and won’t become a burden if you suddenly lose your job or something else happens that affects your earning power — such as becoming permanently disabled or having to care for a loved one in a similar situation. All things to consider, but make sure the premium is “set it and forget it.” It has to be money you don’t miss. A good rule of thumb is committing between 2-5% of your gross monthly income to a monthly premium.
How to make the most of your whole life insurance policy
To get the most value out of your policy:
Purchase a policy early. The younger and healthier you are, the cheaper your rate would be. To save hundreds — or even thousands — of dollars over the life of your policy, apply for coverage as soon as you’ve decided you need it.
Only buy the coverage you need. A whole life policy is an investment product — but it’s not your only option. For a balanced financial plan, aim to take out a policy that protects your assets and provides for your family, and then funnel the rest of your funds into retirement accounts or other investment vehicles. To work out how much life insurance to buy, think about your financial obligations now and in the future.
Pay back any loans against your policy. You’re free to borrow against your whole life policy as soon as you’ve built up enough cash value. However, if you fail to repay those loans, your insurer will dip into the death benefit — which means your beneficiaries might not receive as much money as you intended.
Bottom line
Whole life insurance offers permanent protection, plus the opportunity to invest. It’s ideal for people who want to turn their policy into a cash asset and those who want to use it for estate planning purposes. However, whole life insurance is expensive and it can take a long time to build cash value — and start taking advantage of the ‘living benefits.’
Ask your provider if they offer accelerated payment structures. Some insurers, like Guardian, will let you pay off your policy up front or over the course of 5 or 10 annual payments. After that, any money you contribute will go straight to the cash value portion of your policy.
Alternatively, you can choose to pay an additional premium on top of your regular premium each month.
Are all whole life policies permanent?
Some whole life insurance policies expire when the insured turns 100 or 121 years old, so be sure to read the fine print. If you hit that age, your coverage would expire, but the insurer would still owe you the cash value.
Do I need to take a medical exam?
Usually, yes. Some providers offer simplified issue and guaranteed issue policies, which don’t require a medical exam. But coverage is usually capped at small amounts like $50,000, so they’re typically marketed as final expense policies for seniors.
Katia Iervasi is a lead writer and spokesperson at NerdWallet and a former editor at Finder, specializing in insurance. Her writing and analysis on life, disability and health insurance has been featured in The Washington Post, Forbes, Yahoo, Entrepreneur, Best Company and FT Advisor. She holds a BA in communication from Australia's Griffith University.
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