If you’ve been looking into different life insurance options, you might have heard about term policies and whole life or ‘permanent’ life insurance policies. While both options have their own merits, we’ll be focusing on whole life insurance policies in this article (you can learn more about term life insurance policies here ).
What is Whole Life Insurance?
Whole Life Insurance policies work just like other life insurance policies, they pay out a lump-sum death benefit to your listed beneficiaries if you pass away during the policy term. If you do not list any beneficiaries or none of them are still alive, the money goes into your estate.
The difference is that with whole life insurance compared to term life insurance is that a whole life policy never expires. The policy term is the insured’s whole life meaning you pay premiums until you pass away or cancel your insurance. Many of these policies also come with a savings component where you can accumulate cash value on a tax-deferred basis that you can access even while you’re alive – this is often referred to as a living benefit.
If you want to build up this cash value, you just send the insurance company more money than your premiums require. You also have the option to reinvest the interest or dividends you earn from this back into the policy to accumulate further.
To access this money, you can withdraw it early or take a loan out on the accumulated cash value. Even though withdrawals like this do not reduce your death benefit, your insurer will charge interest on the loan and any unpaid loan amounts will be deducted from your death benefit.
Do I need Whole Life Insurance?
The decision to purchase life insurance is a very personal one. Most people are triggered by certain life events such as a marriage, the birth of a child or when you make a big financial commitment like buying your first home.Since the primary purpose of a life insurance policy is the lump-sum death benefit, you should consider it if you are the primary income earner and have a spouse or dependents that you would need to take care of.
If you’ve decided that life insurance is a necessary part of your financial planning, the question then becomes a choice of whether to purchase a whole life or a term policy. If you can afford the monthly premiums on a whole life policy, it is almost always the better option – especially if you’re buying early. Whole life policies never expire and are in force as long as you continue to pay premiums you do not have to worry about whether you will still qualify for insurance later on down the line.
How much insurance is enough?
To determine how much insurance you need to purchase, you would need a holistic view of your assets and overall financial situation. Most advisors would recommend that you purchase enough to cover any debts you might have with enough left over to invest and provide a source of income to your dependents.
This is to ensure that they are taken care of until they can fend for themselves and could be higher if your dependents have permanent disabilities, medical conditions or need additional funds to pay for college.
When should I buy?
As with most personal insurance products like life or health insurance, your premiums are largely based on your age. The younger you are, the cheaper it will be.
Another point to consider is loss of future insurability. If you happen to develop a serious medical condition later in life, you may not be eligible for insurance in the future. Even if you are, the premiums might be unaffordable.
If this is something you’re concerned about, it is better to buy life insurance while you’re still young and healthy in order to lock in the lowest premiums possible. This is especially true if you anticipate starting a family in the next few years.
If you’re still confused or would like to learn more about which option is right for your specific situation, contact us here.