Whole life insurance
What is whole life insurance?
Whole life insurance combines life insurance with an investment component. A portion of the policy premiums goes into a tax-deferred investment. The investment builds a cash value that can be withdrawn or borrowed against. Whole life premiums are higher at the beginning of the policy, but then stabilize for the rest of the person’s life.
The premiums on whole life policies are substantially more expensive than they are for term life policies, but the rates are consistent throughout the policy. Term life insurance, on the other hand, does not include an investment component and offers only a death benefit. The premiums on term life insurance increase at a predetermined interval. For example, if you buy a 10-year term life insurance policy, your rates likely will rise after 10 years.
Whole life insurance is not without its downsides, however. Disadvantages of this type of insurance include:
- Rate of return: Financial advisers who advise against whole life policies argue that it does not provide a good rate of return compared with traditional investments. Furthermore, insurance companies don’t disclose which part of your premiums goes toward life insurance (versus how much goes to the savings component of your policy). Since you don’t know how much is being added to savings, you have no way of knowing the exact rate of return.
- Expense: Whole life is considerably more expensive than term insurance, and it tends to have expensive management fees and agent commissions. The commissions on whole life insurance can be 130 percent to 150 percent of the first year’s premium.
Example of whole life insurance
With whole life insurance, you won’t pay taxes on interest, dividends or capital gains until you withdraw the proceeds from your savings. You can borrow against your savings without incurring penalties or taxes. Unlike term life policies, which usually end when the beneficiary is 65 to 70 years old, you can keep a whole life plan until you’re at least 100 years old, and your rate stays the same for the life of the plan. Whole life insurance can provide you with an accelerated benefit if you become critically or terminally ill. Some policies will allow you to receive 25 percent to 100 percent of your policy before you die. You could use the money to pay medical bills or enjoy your last days in comfort. However, if you do this, your beneficiaries will not receive the benefits you planned for them when you bought the policy.