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Whole Life Insurance

Daniel Walker
Licensed Insurance Agent for 15 Years

UPDATED: Mar 19, 2020

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The question most often asked by someone in the market for life insurance is whether to buy term life insurance or whole life insurance. The benefit of a whole life policy is that is acts as an investment. The draw backs are that it will cost more, and may not reap the benefits of other investments in the marketplace.

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The answer to which is best lies with the need of the person asking, their age, health and financial goals at the time. The only way to find out what is the best option for you is to research the features of a whole life insurance policy.

Many people are attracted to the cash value bonus that whole life has to offer in addition to the death benefit. To get the most from this type of policy you have to start early. It takes time for the policyholder to see earnings after the purchase of the policy because of the initial fees and commissions involved.

Types of Whole Life Insurance in Review

There are three main types of Whole life insurance. Although they are similar products they vary, and feature different combinations. The main three include:

Traditional whole life combines the death benefit with an investment that is made in stocks, bonds, or mutual funds. When a traditional policy is broken down into categories, they appear as these examples:

  • Participating – the commonwealth and policyholder shares dividends
  • Nonparticipating – commonwealth or insurance company takes the risk on investment return
  • Indeterminate – variable yearly premiums
  • Economic – the return on investments are used to purchase more term or death benefits

Several other traditional options exist, whereas a universal whole life policy is known for its flexibility in premiums, face value, and factors that determine price. A variable whole life policy value fluctuates. Although there is a minimum guaranteed death benefit, the fluctuation in cash value is based on stock market conditions.

How Whole Life Insurance Premiums Are Divided

Premiums on this policy must be paid monthly or in a single-premium policy which is paid in one lump sum at the time the policy is issued. Fees and commissions are taken off the top leaving very little, if any, savings at the end of the first year.

After the first year the cash value rate of return starts to grow annually. Fees cost the policyholder around 7% monthly. A calculated amount is applied to the death benefit while the remainder is invested.

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The Best Time to Purchase a Whole Life Insurance Policy

A whole life policy is intended for your whole life, but it may not be the best option for someone over 50 unless they have an estate. Whole life policies are good for estate planning since any amount under the federal exclusion of $3,500,000 can be passed on to the next generation tax free. A married couple may use the second-to-die provision which makes the policy non-taxable until the second spouse dies.

This type of policy may also be okay for a person or couple in their twenties or thirties who plan to have the coverage for more than 20 years. Although, this is also the demographic that may select term coverage for its low cost and ability offer protection to children until they are able to take care of themselves. It is in the later years that the whole life investment begins to grow exponentially. The first 10 years demonstrate a slow growth.

The Pros and Cons of Whole Life Insurance

The best feature of the whole life policy is the investment and savings option. You can also borrow from a whole life policy. Gifting is another good feature which allows the insured to gift the face value to a loved one or charitable organization tax free. If the insured lives to age 100 they are no longer obligated to premiums, yet the insurance coverage continues.

The cons whole life insurance policyholders face is the decrease in the death benefit or face value in slow economic times or if a loan is made against it. Although there is an investment option, there are other investment options that will yield a greater return. The policyholder must decide if they want to tie up their money in this way, or in a way that will yield more money. A person over 65 will also pay higher premiums, especially if they have health issues.

Whole Life Insurance Yields

Most people sit down with a financial planner or an insurance agent to calculate how much insurance they need. They also determine how much they can afford to pay in premiums, in addition to how long they need to pay into the policy to get the desirable outcome. Rates of return will depend on the type of whole life policy issued.

Where to Find a Whole Life Insurance Policy

One of the most important aspects of purchasing a whole life insurance policy is to make sure the carrier is stable. A staple in the insurance industry with a well known track record would be a good option. Most people have relatives and friends who are willing to share their experience. Otherwise, the internet is a good place to start your research.

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