Choosing a life insurance policy is something that should not be taken lightly. The right policy can provide financial peace of mind for you and your family in the case of your passing, but there are different options to choose from, and not all options will be a good fit for every person. In general, life insurance coverage can be divided into two broad categories: term and permanent, also known as whole life. As the names suggest, term life insurance has shorter, customizable lengths, while whole life insurance is for a longer duration.

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Whole life insurance policies can be an important financial tool for certain people, as they offer lifelong coverage and can provide an investment component. However, understanding the rate of return on a whole life insurance policy can be confusing. In this article, we will look at how to calculate the rate of return on your whole life insurance policy and who may want to consider this type of coverage. With the right knowledge, you’ll be better prepared to make an informed decision that best suits your needs.

What is whole life insurance?

Whole life insurance is a type of permanent life insurance, meaning it is guaranteed to cover the insured person for the duration of their life as long as the premium payments are made on time. That differs from term life insurance policies, which typically offer coverage from five to 20 years on average.

Whole life insurance policies are the most common type and generally offer a fixed premium rate, which means the premium you pay when you purchase the policy is guaranteed to stay the same throughout the life of your policy. The death benefit you receive from a whole life insurance policy is also guaranteed, so you know exactly how much your loved ones will receive if they need to make a claim on your policy.

Another benefit of whole life insurance is that it offers a cash value component, which gives the policyholder the option to withdraw funds or take out a loan. If you need money, you can use a portion of the money you have been putting into your policy for funds for unexpected expenses or other financial needs. The only caveat is that you will typically have to pay back the loan with interest.

Whole life insurance is permanent, which means the death benefit is guaranteed for life as long as the required premium payments are made.

However, there are some potential downsides to these types of policies. For example, because the length of the policy often spans decades and the insurer knows that a payout is inevitable at some point, the premiums are higher than they are with other types of life insurance policies.

How to calculate your whole life insurance’s rate of return

It is a common belief that the cash value in your whole life insurance policy will increase substantially year over year. However, that’s rarely the case. If you are looking to calculate your money’s projected growth in a whole life insurance policy, you have come to the right place. We compiled a few tips to help you figure it out without all the complicated insurance jargon.

Hire a professional

Several factors are used to set the IRR and the average consumer may not be aware of all of them. A life insurance analyst or financial planner is able to analyze your policy’s projected performance over time, compare it to other policies and help you figure out an accurate estimated IRR. They can also look into things that affect the IRR, like mortality rate changes, give you a realistic idea of how much your money could grow in the near future, and suggest more lucrative investment products.

Examine the insurance company’s dividend payout history

While whole life insurers frequently will not disclose how your rate of return is calculated, they will offer illustrations of how your policy is projected to perform in the future.

These illustrations should include information on the costs of the policy, how much you have paid, your current death benefit and the cash surrender value you would get for canceling the policy today. It should also include future predictions on how your policy should perform five, 10 and 20 years down the road. But these projections are often lengthy, esoteric and unrealistically optimistic. What you should be looking at is the company’s dividend payout history. If a company has never generated dividends under 5.5 percent or 5.25 percent in the past 100 years, it has a strong financial position.

Check IRR projections over the next decade

To understand the rate of return for your whole life policy, check out how the policy is projected to perform over the next few decades, which includes the average annual and year-by-year rate of return for 20 years or more. But since this rate can vary greatly, it is impossible to predict how much money you might make in the long run, unless you hire a financial professional to determine the future value of your policy. A third-party insurance analyst is the best person to evaluate whether or not a whole life policy makes sense in the long haul.

Is whole life insurance worth it?

Given everything we have mentioned until this point, you are probably wondering if whole life insurance is a good investment. The short answer is that whole life insurance is worth it for some people. Specifically, whole life insurance can be a good option for high-income individuals who have maxed out their tax-deferred investment accounts, like a 401(k) plan or Roth IRA. It can also be beneficial for individuals who have life-long dependents, like children with special needs.

However, whole life insurance policies are typically expensive. Unless you are getting an amazing internal rate of return (IRR), it is not worth the high premiums. For a majority of people, a term life insurance policy is a better option. The premiums are cheaper and you can get a similar amount of coverage.

It is important to remember that just because whole life insurance has an investment component, it does not mean it is a great investment strategy. The IRR on a whole life insurance policy is typically very low compared to other investments because life insurance has additional expenses that other investments do not require.

Frequently asked questions

    • There is not just one life insurance company that offers the best whole life policies for everyone. Each company has their pros and cons, so the best one for you depends on your personal needs and life situations. It is recommended that you research the major life insurance companies that offer whole life in your state or work with a professional advisor to make the choice easy for you. The Insurance Information Institute suggests you get a minimum of three quotes when shopping for coverage so you can compare rates and plans.
    • Whole life insurance is suitable for various people with different needs, particularly those doing long-term estate planning or supporting a lifelong dependent. For example, if you have a child with special needs, your family may need a life insurance policy that covers your child for their entire life. Another situation where whole life insurance may make sense is for business owners with insurable interest. Regardless of whether you are a sole proprietor, a partner or a business owner with key employees, you may want to be certain that your family, business and estate are protected. It can also be a good option for high earners who have reached the maximum contribution limit for tax-deferred investments, like a 401(k) account.