Life Insurance is something that has been on the hype for quite few times now. The uncertainty in the human life has been on the peak where the death is really uncertain these days. There are many ways for death. People in past used to die when they grew old. They used to live life happily and healthily and final die of being too old. The life expectancy too used to be above 90 years but now, the things are really odd, there is no guarantee of anyone’s life. There is disease, accidents, uncertain deaths everywhere.
It is this time life insurance comes into play. Life insurance has been on the rise as more and more people are engaging on the awareness that has been created through the insurance policies. Some go for whole life insurance, some for the term life insurance, some for the non-life insurance, anything they are going for, they are aiming for the uncertainty they might have to face in future.
Life insurance is for the people who know that their life isn’t just theirs, they have to plan for the life after theirs too. The family that is dependent on them need to survive after them too, that is why people go for life insurance.
Life Insurance Types
There are basically two types of life insurance namely Term Life Insurance and Whole Life Insurance. For quick description, term life insurance is and inexpensive and basic form of life insurance. You basically pay fixed premium for fixed number of years as decided earlier. After the maturity of the term life insurance, the premium payed earlier is returned to you if you outlive the term. And the best thing is that the amount is completely tax-free as it is not income, but refund of premiums.
Whole Life Insurance on the other hand by definition, offers the coverage for your entire lifetime so long as you continue to pay the premiums. This life insurance is also referred to as “guaranteed whole life insurance”, as the insurer promises to keep the premiums constant over the life of policy. If you meet death before the maturity of the policy, your beneficiaries will receive the payout. The whole life insurance is designed to offer tax benefits and have a cash value component which grows over time and is good to consider if you are interested not only on the benefits of life coverage, but in the cash value as an investment.
How Whole Life Insurance Works?
A permanent life insurance policy is something that is guaranteed to pay at some point in life rather than expire. Keeping this in mind, whole life insurance is the most basic and consistent permanent life insurance you can ever buy. Under the whole life insurance, the premium and death benefit you are termed at the beginning remains the same throughout the policy’s life. As the insurer invests your premium, the policy also accumulates a cash reserve also known as “cash value”. These funds can be used as premiums, reinvested or saved for future, it’s all up to you. It may cost you much more than the other term insurance policy but the death benefit is guaranteed as long as the premiums are met.
In the case you pass away, the policy beneficiaries should file a claim with the insurer, after which, the circumstances of your death will be reviewed and receive the payout. This step seems so simple but yet is complicated as if your child doesn’t know that they are the beneficiary to your life insurance policy, they may not be able to claim the payout. So, you would better keep your family informed about the insurance policy.
Whole Life Insurance Key Elements
- Death benefit: Also known as face value of the policy, it is the payout your beneficiaries will receive upon your death. The death benefits are tax-free as long as you are well below the federal and state exemption limit. Policy face values are available in increments of $50,000 or $100,000 which can easily go up to several million dollars. These are generally more expensive and the death benefit directly impacts that cost, so you would better evaluate your family’s need before deciding the purchase.
- Premium: This is the cost of policy divided annually, bi-annually, or monthly depending on your insurer. Premiums are generally paid for the life of the policy, though some choose to pay higher premium for short period of time in order to make sure their policy doesn’t lapse later. This option is generally useful for the one’s who have relatively high income at present and want to lock in to the coverage for their family no matter what happens to their income later. It is the simplest way to reduce your family’s financial risk if you can afford the premium at present.
- Cash Value: Whole life insurance assures cash value over time. The cash value grows tax-deferred over time and is guaranteed to grow at a particular rate. While the guaranteed rate of return on the cash value may be lower than other financial products, it can lower the overall volatility of a portfolio. The cash value can also be used to:
- Pay premiums
- Purchase additional coverage
- Provide a tax-free loan
If you have burrowed against the cash value of your policy and pass away, the loan will be deducted from the policy’s death benefit.
- Dividends: Dividend paying the whole life insurance, also known as participating whole life insurance, refers to policies offered by certain insurers that pay dividend in case the insurers perform better than expected. Dividends are dependent on your insurer’s performance, there’s no guarantee they will be paid each year, though some insurers have consistently paid the dividend for decades. If you have to choose from two insurers with the same features and premiums, the one which provides dividend is better choice.
When Do You Need Life Insurance?
If you are like most of others, you won’t need life insurance up until you have kids. Afterall, the main focus of you taking life insurance is in event of your death, to replace your income for the people who are dependent upon your income. There are only few cases you would get your life insurance for your spouse before you have kids.
Insurance becomes progressively more expensive as you age. In fact, premiums can be almost 2 times as expensive for a 40-year old versus a 35-year old. Most individuals under age 25 are more concerned with paying current bills than acquiring the additional ones. The optimal age to purchase the insurance is under 35.
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Whole Life Insurance Pros and Cons
Everyone has their own perspective to see the things their own way. Some might do some detailed analysis while some just go with the words of the policy seller. There are many benefits and some downsides as well which might or might not fit a variety of financial situations. Some of the pros and cons of the whole life insurance is given below.
- Whole life insurance policy premiums are guaranteed to stay same all your life.
- It is permanent insurance meaning your protection will be there as long as your premiums are paid.
- Cash value is built and the growth of your cash value is guaranteed.
- Death benefit, as well as the cash value, is guaranteed.
- You have choice to utilize the cash value for premiums or withdraw or ask for tax-free loan.
- You can stop paying premiums at some point and convert your cash value to a “paid up” policy with your policy continuing to grow and protecting your family, without having to pay the premium.
- You can cancel your policy any time and any cash value you have accumulated over time will be returned to you.
- If your policy provides dividends, they are considered a return of premium.
- If your health changes in future, you’ll remain covered and aren’t required to take additional health assessments.
- Whole life insurance generally has higher premiums than term life now but term life insurance generally has higher premiums than whole life insurance later. It generally means you have benefit at present with term life insurance but not in long run.
- Growth of whole life cash value, though guaranteed, may be less than the growth of investments which lack such guarantee.
- Whole life insurance has greater flexibility in order to fit your unique situation, needs and goals. This flexibility makes it extremely important to make some knowledgeable move with well known consequences.
- The premiums for the whole life insurance are considerably high compared to another cheaper version.
- You have little control over the investment choices made by the insurance company.
Should You Buy Whole Life Insurance?
Whether whole life insurance is for you or not, it solely depends upon your financial status. If your primary objective is to obtain life insurance that would provide the death benefit to your family to save them from the financial crisis, then this might just be an ideal deal for you.
Whole life insurance is good to have if you are interested in the whole life coverage benefit and want to take advantage of using the cash value as an investment medium. For example, if you are young and have relatively high income, you may be absolutely fine with the high premium cost, as having the life coverage and death benefit would be your prime focus. You will also have plenty of time, even decades, for the cash value to accumulate and grow into a sizable asset.
Whole life insurance alone is not a better means of investment and needs be considered only as just another means of investment. If you are just in the investment thing then whole life insurance isn’t the best place to start with in the first place. But you already have your emergency fund covered, and are looking for the new tax-advantaged accounts for retirement planning, then whole life insurance should definitely be considered.
You will want to buy the whole life insurance in couple of common scenarios:
- You have significant amount of loan or have upcoming loans following the expansion of your family. You would definitely want your child be covered with the benefits of financial coverage even after your life.
- You want your family to be fully financially covered after your death and be benefited from the cash value as well during your lifetime.
Conclusion on Whole Life Insurance Pros and Cons
The process of buying an insurance policy is really a headache, but at least you get into the tune once you begin shopping. It is the best thing to be assured that life after you isn’t painful for your family who are just dependent upon your income. Once your income source gone, say, after your death, you won’t be willing to let your family struggle for the simplest of things.
Life insurance is something that makes you assured that you have your beneficiaries covered financially no matter what type of insurance you choose to have. Both the term life and whole life insurance provides you assurance for your life coverage. Term life insurance covers you for certain time given that you pay the insurance premiums on time and if you survive the term, your premiums are returned to you and is tax-free.
Whole life insurance assures your beneficiaries that they have their future covered through the amount they will be getting after you pass away. It also has cash value that provides you an extra benefit that term insurance lacks. You have your cash value that is guaranteed to grow.
Once you have identified the policy that best suits your needs and wants and is sure to cover all the expenses and bills you have or will be having in future. Insurance is generally bought when you have a generation next to come. You have the responsibility of your new one upon you and you want to leave behind only the happiness and assurance when you pass away.
Just choose the best one for you, just analyze your risks and income, do the calculation about the premiums and the cash value in term of whole life insurance. Make your beneficiaries aware about the policy and watch your pros and cons of whole life insurance turn into just pros when you choose the best policy with appropriate assumptions and calculations.