Whole life insurance

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Unless you’re a financial professional, you probably find the whole topic of life insurance confusing. There are several different types, after all, and different rules and regulations that go with each one. In this report, we’ll walk you through whole life insurance and look at the pros and cons so you can decide if it’s right for you.

What is a whole life insurance policy? The two main types of life insurance are term life insurance and whole life insurance. Term is probably the easiest to understand: you pay a premium, and when you die, your beneficiary or beneficiaries earn a death benefit. But once the term life insurance expires, the policy ends and there is no longer a benefit. But whole life insurance is a little different.

Read on to learn more.

What is whole life insurance?

As the name suggests, it lasts for your whole life, as long as you keep paying the premiums. Unlike term life insurance, it doesn’t have an end date when it expires and is no longer a valid policy.

But there’s more to it than that: whole life policies also include a savings component, called “cash value,” and you can borrow against the money in that savings account as needed. This savings account is funded by the premiums you pay regularly for your policy. It does earn interest but the amount you earn in interest is generally low. Term insurance does not have this additional savings component.

You can access the cash value of your policy by withdrawing money from it, as you would from a regular savings account. As long as you don’t surrender your policy (in other words, stop paying premiums for it so that it’s no longer active), there are no taxes on the money you withdraw. You can also take a loan against that cash value, with a low interest rate.

How does whole life insurance work?

Let’s say you’d like to leave a death benefit of $100,000 to your children. You would take out a whole life insurance policy and designate your children as the beneficiaries. You would pay premiums on the policy every month but, for the first few years, there wouldn’t be much equity in the cash value of the policy.

But in 20 years if you need an influx of cash – say, $20,000 to pay for your daughter’s college tuition – you could take that out of the savings account portion of your policy (assuming you have that much saved up). The money would be a portion of your premiums along with any accrued interest.

However, unless you pay back the loan, along with any interest, the amount you borrowed will be deducted from your death benefit. So, in this example, your children would only receive $80,000 instead of the originally planned $100,000.

Best whole life insurance

Northwestern Mutual

Northwestern Mutual tops J.D. Power’s 2019 list of the best life insurance companies, which looks at overall customer satisfaction. The company offers financial planning services along with life, disability and long-term care insurance. The company has financial advisors on staff who will work with you to pick the best insurance product for your investment and financial goals.

State Farm

The largest insurance company in the U.S., State Farm placed second on J.D. Power’s list. It offers whole life (called permanent life on its website) and term life, and has policies that offer flexible premium payments and level or increasing death benefit options. State Farm’s well-designed website makes it easy to manage your policy online, if you prefer. One small caveat: it’s not licensed to sell life insurance in Massachusetts.

MetLife

MetLife offers term and whole life policies for individuals and through businesses and writes more life/annuity insurance than any other company in the U.S., with 13% of the market. It scores in the middle of the J.D. Powers list, with three Power Circles to Northwestern and State Farm’s five — this indicates that good customer service isn’t quite as much a priority at MetLife. But having said that, the company’s level of service indicates that most customer interaction is positive.

New York Life

New York Life scores above the industry average on the J.D. Power survey, and it’s the fourth largest writer of policies in the U.S. It offers several types of life insurance, as well as retirement income investment, long-term care and other financial services. Although no insurer guarantees dividends, New York Life has been paying them annually for 164 years. The company offers two variations on whole life in addition to basic coverage: you can purchase a Value Whole Life policy if you’re getting closer to retirement and want to maximize your life insurance coverage; and a Custom Whole Life policy, that allows you to pay premiums only for a limited time (they will be higher), so you can maximize the cash value growth as much as possible.

Is whole life insurance worth it?

It may be, depending on your financial goals. There are several types of people who benefit most from whole life policies. Those with higher wealth who are looking for ways to defer taxes may like that aspect of a whole life policy. And if you have difficulties saving money by other means, a whole life policy can be a sort of forced savings account that allows you to build equity while providing income to your heirs.

But here’s the thing: whole life policies are significantly more costly than term life insurance — and that proves a problem for the high numbers of policyholders who abandon their policies before they die. If you can’t afford the relatively high monthly premiums for whole life, a lower-priced term life insurance policy may be better for you.

Frequently asked questions

Is a whole life policy a good investment?

Whole life insurance probably shouldn’t be the centerpiece of your financial investment plan. It’s not really intended as a way to make money. Instead, its purpose is to allow you to leave a legacy. However, as one part of a balanced portfolio, the cash value portion of your policy, which earns interest and is tax deferred, can be a sound investment.

Which is better: whole life or term life insurance?

That depends on your goals. If all you want is a vehicle for providing a death benefit for your heirs for a certain amount of time, term is your best bet. If you’re looking for a long-term investment that can reap dividends and possible loans in addition to providing a death benefit, whole life might be better for you.

How much life insurance do I need?

That depends on your situation and what you hope to achieve with your policy. One rule of thumb is to have a policy that can pay out 10-15 times your annual income. But if you have additional responsibilities that will continue beyond your death — say, a child with special needs who will require life-long care — you may need more.

Do I need life insurance if I’m single with no dependents?

Possibly not, since you won’t need to provide support to your heirs after your death. You may want to take out a policy to pay for your funeral, though, or to remember a favorite charity or close friend. And if having access to the cash value of your policy seems like a good idea that meshes with your future plans, it’s worth investigating a whole life policy.