If you’re considering a whole life insurance policy, perhaps you want life insurance to cover you for life. Unlike a term insurance policy that covers a certain period of time, your whole life policy remains in force as long as you live. As long as you pay premiums, your whole life insurance death benefit and (in many cases) premiums remain the same. As with any insurance purchase, compare multiple whole life insurance quotes to identify the best policy for you.
Whole life insurance can also help you build cash value. That is, the insurance company invests part of your premium and provides a return on investment. Cash value in the policy is considered tax-deferred until you withdraw the funds or borrow against the policy value. There are many different types of whole life insurance products. Let’s look at several common whole life insurance policy types to determine if a whole life insurance policy is right for you.
Whole Life Insurance Choices
Common whole life policies include traditional, single premium, and interest sensitive insurance policies:
- Traditional whole life insurance provides a guaranteed rate of return on your policy’s cash value. The guaranteed rate is usually considered a minimum and not a maximum rate.
- A single premium whole life policy may work well if you have large amount of capital to invest at one time. In most cases, the financial advisor or sales agent will prepare a proposal to demonstrate the benefits and anticipated rate of return of the single premium whole life policy. You provide a single premium–your total investment–to the life insurance company along with the application. The insurer’s underwriting team prepares your policy. A single premium whole life insurance policy builds cash value and shelters growth on returns from current taxes.
- An interest sensitive whole life policy provides a variable interest return on the cash value portion of the policy. This type of whole life insurance policy works something like a floating coupon bond or adjustable rate mortgage (ARM). An interest sensitive whole life policy may offer more flexibility, e.g. increasing the policy’s death benefit without increasing your premiums in certain economic conditions. In a rising rate environment, the interest sensitive whole life policy protects your investment without locking in a certain rate.
Whole Life Insurance vs. Other Life Insurance Types
Unlike popular term life insurance, a part of your premium is used to grow the policy’s cash value. Cash value growth can pay off the whole life policy in a few years. Deferred taxes can also help the insured’s cash value to grow faster.
Many whole life insurance policies offer stable, flat premiums unless the insured elects a rising or declining premium payment schedule.
Importantly, the whole life policy offers insurance coverage for life. After the insurance company’s underwriters create the policy, you won’t need medical exams in the future.
People in search of conservative income investments are sometimes encouraged to purchase whole life insurance or, similarly, tax-deferred annuities. If you’re considering whole life insurance for a child, or if you’re considering it for yourself, ask questions now.
Whole Life Insurance as an Investment
Whole life insurance policies are sometimes purchased by the most conservative investors. Most whole life insurance policies provide a very low ROI when compared with other vehicles that are appropriate for conservative people.
Whole life insurance policies differ. Consider the investment rating of the insurance company and check with your state department of insurance to verify that the firm is licensed to sell to you:
- If an insurance company’s credit rating is low, be wary about making a long-term commitment to them.
- Though life insurers are generally the best capitalized of insurance companies, it’s possible for your life insurance company to die before you do. History shows that state-centric or regional insurance companies are the most likely to fail. More than 300 U.S. life insurance companies have failed since the 1940s.
Some parents decide to purchase inexpensive whole life insurance for their children. Gerber Life Insurance, affiliated with the baby food manufacturer of the same name, sells low-cost whole life insurance to parents and grandparents for children between 14 days to 12 years old. The premiums are modest. For instance, a USD 50,000 policy costs less than USD 50 a month.
The decision to buy whole life insurance as an investment is a personal one. If you need life insurance and can’t get term life due to illness, evaluate the whole life policy based on its protection value and not the ROI.
Whole Life Insurance: Insurance for Life
If you’re considering whole life insurance, you probably believe in the benefits of tax-deferral an long-term capital appreciation. Whole life insurance can be a slow and steady investment for risk-averse people in need of life insurance. Consider the tax benefits and potential to grow cash value as added bonuses if you plan to purchase life insurance protection for family members or yourself.