It’s easy to remember what kind of policy permanent whole life insurance is because it lasts for your whole life. But, in addition to this, it includes a level premium (similar to some level premium term life insurance policies), meaning that the rate you pay for the policy each month stays the same for the duration of the contract you make with your insurer.
Another commonly noted feature of whole life insurance is that premiums tend to be higher—because the policy covers your whole life—and that means that they may not be right for every kind of policy seeker. And, while whole life insurance is a permanent form, it’s important to realize that it is not the same as other permanent policies that you may have an interest in. You’ll find some of those differences between whole and permanent life insurance, in general, summarized in the next section.
Workings of Permanent Whole Life Insurance
Whole life insurance works like other policies: in exchange for a monthly premium payment, the insured receives guaranteed death benefits that activate upon the death of the insured. The policyholder (usually the same as the insured) names certain beneficiaries for these death benefit funds and determines the kinds of payments to be made. Beyond this, like any kind of insurance product, whole life brings certain other advantages and excludes others. Read on to see what advantages and features it offers.
Advantages of Permanent Whole Life Insurance
The first important feature that benefits policyholders is what’s known as “cash value.” Cash value acts as a savings vehicle for policyholders and helps them generate more worth. It’s divided between guaranteed cash value and projected cash value.
With guaranteed cash value, excess payments to the insurance company above a certain limit build a reserve that you can access while you are living. When you access this reserve, your death benefit is affected, but it can be useful to many when extra money is needed to cover other important expenses and emergency needs reports the Insurance: Mathematics and Economics journal.
On the side of projected cash value, the value is based on dividends, which most whole life policies have the ability to access. It’s good to note that compared to stock companies that come with shareholders, mutual companies usually give higher dividends to their policyholders. These higher dividends can be used in a number of beneficial ways:
- Use your dividends as cash.
- Buy more insurance for a higher death benefit.
- Earn interest on your dividends with tax deferment.
- Offset your payments to insurance by using dividends for premiums.
These whole life insurance dividends practically mean that you are a partial owner of the mutual insurance company that gives you the right to profit-sharing through them. In essence, the insurance company gives you a refund when the cost to insure you—as they calculate it—is less than the amount you’ve paid in premiums. Even with these options and perks, some still prefer a term-based policy to be discussed.
Reasons to Prefer Term-Based Policies
One of the most common hesitations of policy seekers looking at term vs. permanent whole life insurance is the price of premiums. While the whole life policy comes with flexible features that term-based policies do not have (such as cash value and dividends), level premium term policies have lower rates, a highly important factor for insurance consumers says Statista.
The reason is simply that term life insurance covers you only for a certain amount of time (10, 20, or 30 years, etc.) Because of this time-limited arrangement, life insurance companies are able to minimize risk and offer premiums with lower expense to you—even while sacrificing savings vehicles and investment-like options. More, some whole and other permanent policies face the need to keep up with inflation which is why some also prefer term insurance according to the Journal of Risk and Insurance.
Whole Life vs. Permanent Universal Insurance Comparison
While permanent and whole life insurance are sometimes talked about interchangeably, there is one other form of life-lasting policy that comes with several variations: Universal life insurance. Compared to whole life insurance, universal life is complex because of the diversity of forms it takes. It also contrasts in its cost.
Premiums and Costs
Whereas whole life uses a level premium, universal life insurance uses a minimum cost. That minimum cost must be met and covered each year to keep the policy active. But, this minimum payment doesn’t always come from the owner’s own funds because there is sometimes enough cash value to satisfy that minimum requirement. This is similar to how cash value can be used, within whole life insurance, to pay for some of the premiums of the policy.
Another twist on premiums is that universal life insurance doesn’t keep the minimum payment the same each year. Instead, the cost of holding a universal policy goes up annually with increases in the likelihood of mortality. That’s why policyholders often choose to invest as much as they can into the cash value element of the policy in order to keep ahead of hikes in price. In that way, as years progress, the policyholder is able to accelerate growth and beat increasing costs even as they enter advanced age.
Aside from differences in their pricing structure, universal life (as noted) brings with it many more options on how to structure the policy. And, each of them serves a unique need for the insured while leaving out other features that may be valuable to you. That’s why it’s important to speak to an expert like Sproutt about which policy might be the best fit for you, but here are the four variations:
- Guaranteed universal life
- Traditional universal life
- Variable universal life
- Index universal life
If you’re interested in learning more, you can learn about each variation of universal life insurance in Sproutt’s detailed article.
Is Permanent Universal or Whole Life More Worth It?
As we’ve pointed out, whole life and universal life insurance vary in important ways of pricing and the potential for customization through variations. They share the permanent attribute of insurance that expires only when the insured becomes deceased, and they also bring in the cash value and dividends component that attracts many who are interested in an additional savings vehicle.
If you value the idea of having a policy that can cover you forever, you may think that either whole or universal permanent life insurance is a good option. It’s true that permanent life insurance can be a wise investment for those who can handle the higher premiums and the need to work carefully and closely with an expert to devise the right life insurance policy for your situation. But, because of their differences, they are not right for everyone.
Choosing the Best Whole Life Insurance
Before you choose, consider the pricing structure. Since many go with term-based policies because of a low, often level, premium, whole life insurance may cost more, but it offers a fixed premium that won’t change as your rate of mortality goes up later in life.
Universal life insurance does not have a fixed structure, and, for some, the rising cost of insurance may turn out to work against them—despite some of the advanced features that variable, index, guaranteed, and traditional universal life variations bring in.
To decide if whole or permanent universal life insurance is better for you and most worth it, the best option is to consult a trusted partner in life insurance to weigh your options, get quotes, and choose wisely.
Work with Sproutt to select the ideal life insurance policy for you using their market insight and advanced online tools for getting quotes.