Whole life insurance

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People in the market for life insurance may be overwhelmed by all the different types of policies: term, whole life, variable whole life, burial insurance and more. It’s important to have a basic understanding of what each type of policy offers in order to make the best decision.

Ultimately, there are only two main categories of life insurance: term or permanent, and whole life insurance is a sub-type of permanent life insurance.

What is whole life insurance?

As a type of permanent life insurance, whole life insurance lasts for life, as long as the premiums are paid, and beneficiaries are paid out upon the insured’s death.

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 policy’s premiums, and typically earns a small amount of interest.

The cash value of the policy can be accessed by withdrawing money from it, similar to a regular savings account. As long as the policy is not surrendered and the premium payments are current, there are no taxes on the money withdrawn. A low-interest loan can also be taken against that cash value.

How does whole life insurance work?

If someone wants to leave a death benefit of $100,000 to their children, would take out a whole life insurance policy and designate the children as beneficiaries. While premiums would be paid every month, there would not be much equity in the cash value of the policy for the first few years.

But in 20 years, if an influx of cash is needed for a child’s college tuition that money could be withdrawn from the savings account portion of the policy, which includes a portion of the premiums and any accrued interest (assuming enough has been saved).

However, unless the loan and any interest is paid back, the amount borrowed will be deducted from the death benefit, and the child would only receive $80,000 upon the death of the insured.

Dividends can also be earned with a whole life policy. While they are typically not guaranteed, many companies consistently pay out dividends annually as cash or a reinvestment in the policy.

Whole life policies may also contain endorsements, or riders, that add functionality to the policy. For example, an accelerated death benefit rider allows access to part of the death benefit if the insured is declared terminally ill by their doctor.

Best whole life insurance

Many regional and national insurance companies offer whole life policies, and choosing the right one may require some research. A good place to start is to get whole life insurance quotes from the companies below. They are all financially sound, known for excellent customer service and feature competitively-priced policies that can be customized to meet varying needs.

Northwestern Mutual

Northwestern Mutual is the fourth highest pick on J.D. Power’s 2020 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. Its financial advisors help people pick the best insurance product for their investment and financial goals.

State Farm

The largest insurance company in the U.S., State Farm was in first place on J.D. Power’s list, indicating a high commitment to customer service. 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 its policies online. 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, according to the Insurance Information Institute (III). It scores above average on J.D. Power’s list and 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 offers several types of life insurance and 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: a Value Whole Life policy can be purchased closer to retirement to maximize coverage, and a Custom Whole Life policy allows higher premiums to be paid for a limited time to maximize the cash value growth.

The cost of whole life insurance

Generally, whole life insurance is more expensive than the same amount of term life insurance coverage. However, whole life premiums remain stable and won’t change.

The cost will be determined by multiple factors, including amount of coverage needed, credit rating and relative health. During the underwriting process, a category is assigned based on these factors, and the rate is determined by how desirable the policyholder is considered to be.

Is whole life insurance worth it?

For some people, it is. Those with higher wealth who are looking for ways to defer taxes may benefit from the savings aspect of a whole life policy. And for those who have difficulty saving money, a whole life policy can serve as a forced savings vehicle to build equity while providing income to any heirs.

However, 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. For those who can’t afford the relatively high monthly whole life premiums, a lower-priced term life insurance policy may be better.

Frequently asked questions

Is a whole life policy a good investment?

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

Which is better: whole life or term life insurance?

That depends. If all that is needed is a death benefit for any heirs for a certain amount of time, term may be the best bet. For those who are looking for a long-term investment that can reap dividends and provide a savings vehicle in addition to providing a death benefit, whole life might be better.

How much life insurance do I need?

That depends on the insured’s situation and desired goals. One rule of thumb is to have a policy that can pay out 10-15 times the insured person’s annual income. But if there are no additional responsibilities beyond death — say, a child with special needs who will require life-long care — more coverage may be needed.

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

Possibly not, since there are no heirs to support after death. It may be a good idea to take out a policy to pay for funeral expenses, though, or to remember a favorite charity or close friend. And if having access to the cash value of a policy seems like a good idea, it’s worth investigating a whole life policy.