What is Whole Life Insurance?
Whole life insurance is a type of permanent life insurance, which means it lasts your lifetime. These policies come with a fixed premium, or the amount you pay, and fixed death benefit, the amount your loved ones get when you die. They also include a cash value component.
Whole life insurance 101
Whole life insurance, also called traditional life insurance, is the most common and simplest type of permanent life insurance.
While other types of permanent life insurance can come with harder-to-understand features like investment-based cash value performance or adjustable death benefits, whole life insurance is fairly straightforward. In exchange for level premiums that you pay on a regular basis, you get two things: a fixed death benefit for your beneficiaries when you pass away and a cash value component you can use while you’re alive.
The benefits of whole life insurance
The primary draw of whole life insurance, as with any life insurance product, is the death benefit. This gives you a way to leave a relatively large sum of money behind for the people who matter most to you.
The people you name on your policy as your beneficiaries get that sum of money when you die. The money isn’t subject to taxes and they can use it however they want. They might use part of it to pay for your funeral and the rest to cover living expenses while they adjust to life without you and your income, for example.
With whole life insurance, you get a permanent policy. That means that as long as you continue paying your premiums, your beneficiaries will get your policy’s death benefit, no matter when you die.
This differentiates whole life insurance from term life insurance policies, which expire after a set number of years.
Also, in addition to a death benefit that’s permanently in place, whole life insurance gives you a cash value component that you can use during your lifetime.
Whole life insurance cash value
When you pay your premiums, your life insurance company puts a small portion of them into a separate account for you. This is basically a savings account, and the money in there will earn a slow but steady rate of return. If you want your cash value to grow faster, you can pay more than your premium (this is called paid-up additions) or you can reinvest any dividends your cash value component earns.
Once your cash value component reaches a certain threshold, you can take out a loan against it or withdraw the funds. This gives you a way to access cash if unexpected life circumstances come your way.
If you don’t repay what you pull from your cash value, your life insurance company can reduce your death benefit by the outstanding amount when you pass away.
Whole life insurance gives you permanent life insurance with a cash value component, fixed premiums, and a stable death benefit.
Who needs whole life insurance
If you want permanent life insurance with a low-risk cash value component, whole life insurance delivers. This policy can be a key part of your estate planning, ensuring that your partner, children, or other individuals who matter to you have sufficient assets to maintain their quality of life after you’re gone.
Whole life policies can also deliver estate liquidity because the death benefit that beneficiaries receive is not subject to taxation.
These policies can also be useful for business owners who want to leave their partners with enough money to maintain operations after they’re gone.
Whole life insurance, like all terms of permanent life insurance, costs significantly more than term life insurance. As a result, it’s best for people who are in a position to see these policies as an investment into their beneficiaries’ future.