Read This Article to Understand Whole Life Insurance for Everything You Need to Know
When it comes to ensuring your loved ones will be provided for after you pass, we know you want the best. It is possible that choosing the best whole life insurance is the right step for you, but it is important to make sure you understand everything about it first.
This will be your guide to all things whole life insurance. We will provide the following information to help you understand the benefits of whole life insurance:
- Define whole life insurance
- Discuss the difference between term and whole life insurance
- List the main whole life insurance pros and cons (which will also be a continuation of the difference between whole life and term life insurance)
- Explain the importance of asking for financial guidance from a professional, comparing whole life insurance companies, and getting plenty of whole life insurance quotes
When you are through this article, you will have a better grasp on the whole life insurance definition, what a whole life insurance policy really offers, and what it could mean for you and your loved ones this year.
A Whole Life Insurance Definition
Before we start going into the benefits of whole life insurance or whole life insurance pros and cons, it is important to define whole life insurance.
The best whole life insurance definition can be found with the following points:
- A whole life insurance policy is a permanent form of life insurance that will remain throughout the lifetime of the insured. There is no date that it expires, as long as you continue to pay your monthly premiums.
- You can choose the specifics, such as the level of coverage, whole life insurance rates, etc.
- Whole life insurance has other unique features such as tax benefits and cash value. We will discuss those in detail during the whole life insurance pros and cons sections.
- You will choose one of the many whole life insurance companies, after getting whole life insurance quotes, to provide your whole life insurance policy. They will have a pre-determined set of whole life insurance rates and fees that will determine how much you end up paying each month.
The best whole life insurance will be affordable each month, while still offering enough payout after your death to make the monthly payments worth it.
The Main Difference Between Term and Whole Life Insurance
You will see below that we will spend much time discussing whole life insurance pros and cons. To do so, we will be comparing whole life insurance with the other common form of life insurance: term life insurance.
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We will break down the fine details of the difference between whole life and term life insurance in the whole life insurance pros and cons sections, but here is a basic look at the difference between term and whole life insurance.
Term life insurance only covers you for a specified amount of time (example: 20 years). Term life insurance expires.
It is typically used to get you through important times, such as raising dependent children. Once the time period is over, your dependents are no longer able to receive any benefits upon your death.
Whole life insurance, by contrast, does not expire, no matter how long you live (as long as you continue to pay your premiums).
Knowing Whole Life Insurance Pros and Cons
The only way to truly know if whole life insurance is the right choice for you is to learn and compare the whole life insurance pros and cons.
Below you will find the six main features that make the best whole life insurance stand apart. As you will see, some are pros and others are cons. The categories we will dive into are:
- Coverage length and guarantee
- Cash value
- Failure to pay
These are also the main features that make up the difference between term and whole life insurance.
Whole Life Insurance Pros and Cons #1: Coverage Length & Guarantee
Undoubtedly, the #1 pro of choosing whole life insurance is the coverage over your entire life and a guaranteed payout when you die.
With term life insurance, you will only receive your benefits if you die within the agreed upon term length. If you die later, you won’t receive anything.
Whole life insurance provides the confidence and security of knowing that, no matter when you die, your family will be taken care of with the benefits of whole life insurance.
- Pro: Your policy is guaranteed for your whole life
- Con: None
Whole Life Insurance Pros and Cons #2: Price
With that first pro (coverage/guarantee), comes our first con of whole life insurance: the cost. A big difference between whole life and term life insurance is that whole life insurance rates and fees are considerably higher than term life.
If you do choose whole life insurance, make sure to shop around for the most reasonable whole life insurance quotes that offer the most benefits.
On the other hand, whatever monthly premiums/whole life insurance rates you agree to from the beginning will last the length of the loan. This means you can lock into a lower price at a younger age.
- Pro: Premiums are fixed and won’t be raised as you age.
- Con: Premiums are going to be considerably higher than term life insurance.
Whole Life Insurance Pros and Cons #3: Cash Value
A unique characteristic of a whole life insurance policy is that it piles up some cash value that you can use at your discretion. This is not available with term life.
Some of the money you pay in whole life insurance premiums will accrue into a cash balance that you are allowed to use. Options can include borrowing the money, using the cash value to pay future premiums or loans, etc.
Remember that whole life insurance companies sell whole life insurance to make a profit. Normally, the first year’s premium you are paying each month goes entirely to their commission. Then, a much lower percentage is removed each year following to continue with the commission.
This means not every dime you put into your life insurance policy will be turned over into your cash value balance.
- Pro: You get back some of what you paid in monthly premiums.
- Con: The first cash value returns will be lower due to the commissions and fees whole life insurance companies take.
Whole Life Insurance Pros and Cons #4: Taxes
There are many tax pros when it comes to the best whole life insurance. Not only will those who receive your insurance payout get it tax-free; you can also take out “loans” from you cash value tax-free.
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If you do not pay back these loans before you die, that amount will simply be subtracted from the total of the original whole life insurance death benefit payout.
The biggest problem with this system is that if you lapse or cancel your plan, that money can be subject to taxes once again. Which means you will not only lose your insurance coverage, you will also owe money.
- Pro: You are able to take out cash loans against your whole life insurance policy tax-free.
- Con: It is imperative to stay up-to-date on your monthly premiums in order to remain tax-free.
Whole Life Insurance Pros and Cons #5: Investment
Some people choose to use their whole life insurance as an investment. The main thing to know about using your whole life insurance policy this way is low returns/low risk.
Whole life insurance rates of return will typically not come near the rates of return of other investments, like those in money market accounts, for example.
But there is an incredibly low risk. Most whole life insurance companies will tell you a minimum interest rate you will earn each year. While it is possible to make more, you will never make less.
If you prefer safer investment choices or if you are not good at saving money consistently on your own, whole life insurance can be a great option.
- Pro: You will have a safer way to invest your money.
- Con: Low returns may not benefit you as much as other forms of investment; the way the whole life insurance companies choose to invest may not be as lucrative.
Whole Life Insurance Pros and Cons #6: Failure to Pay
If you can no longer pay on your whole life insurance, or don’t want to, you can cancel your policy. In this case, whatever cash value you have accrued is yours. This is one of the best benefits of whole life insurance.
However, if you have only accrued a little cash value – or none at all – you will have nothing else to show for the monthly premiums you had been paying. This is similar, then, to a term life policy.
- Pro: It is possible to receive some payout if you have paid into your whole life insurance policy long enough to accrue cash (unlike term life).
- Con: Lapsing your policy may leave you with nothing if your cash value hasn’t accrued much yet.
Why You Need to Talk to a Financial Advisor First
As you can see from the whole life insurance pros and cons, there are many wonderful benefits of whole life insurance. In fact, it may be exactly what you need:
- Lifetime guarantee
- Fixed monthly premiums
- Cash value
- Tax-free options
- Investment capabilities
- Potential cash even after cancellation or lapsing
But there are also some real pitfalls of whole life insurance that should be taken into account:
- Expensive whole life insurance rates
- Low-yielding investments
- Potential to lose everything after cancellation or lapsing
The best thing to do is to get help from a trusted financial professional who will not be receiving commissions from your whole life insurance policy. They can give you unbiased advice based on your unique financial/family situation.
Conclusion: Is Whole Life Insurance Right for You?
Now that you can define whole life insurance and better understand the whole life insurance pros and cons, you can make an informed decision on whether or not to get whole life insurance for yourself.
Perhaps you have learned that a whole life insurance policy will fit best into your financial needs. Or maybe you feel the whole life insurance rates are too high and you’d prefer term life insurance while your children are still growing. Or maybe you still aren’t sure.
No matter where you are with whole life insurance, it is extremely important to speak with a financial advisor who understands your specific needs.
If they advise you to proceed with whole life insurance, make sure to comparison shop whole life insurance companies and get plenty whole life insurance quotes before you decide.
This year may be your year to bring confidence and security into your future and your family’s future, so make sure you do your homework first and choose the best whole life insurance option available to you.
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