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Now that you’ve decided to get life insurance to protect your family financially, the next step is deciding which life cover is the most suitable for you.
The two main types – term life insurance, and permanent life insurance – differ quite a bit, and being familiar with these features is important if you want to make an informed choice.
Buying life insurance isn’t like purchasing auto insurance – you can’t pick a short-term policy and be over and done with it in 12 months.
It’s a long-term commitment, so you should spend some time thinking exactly about what you may want from your life insurance before you make a decision.
So, today lets talk all about whole life insurance. Could this be the right life insurance option for you – or should you be opting for term life insurance instead? Let’s dive right in to find out.
What Is Whole Life Insurance?
Whole life insurance is a type of insurance that – as you may have guessed – covers you for life.
It falls under the category of permanent life insurance, or insurance which, unlike term life insurance, will never expire.
Typically, permanent life insurance types combine a death benefit with an investment element.
With whole life insurance, some of the premium you pay is set aside into a savings account (with interest), accumulating over time.
How To Find The Best Whole Life Insurance
Finding the best whole life insurance does involve doing a bit of digging around to find the best company and prices.
What you should do first is make sure the insurer you’re considering has excellent financial strength.
Knowing they’re financially strong will reassure you that they’ll be around for longer – and be able to pay your claims.
Check out the ratings from A.M. Best to find out their financial strength and other performance indicators.
When it comes to financial strength, look for a score of B+ or higher to be on the safe side.
The insurer you choose should have a good reputation – and great customer service. After all, you’ll have to deal with them for your entire life – so you don’t want a company that causes problems down the line.
When it comes choosing a whole life insurance policy, make sure you correctly calculate the amount of coverage you’ll need (I’ll talk about that in more detail below).
Finally, find out the rate of return on cash value before you commit to an insurer. Top-rated life insurance companies will be upfront about that, so finding out the minimum growth rate shouldn’t be difficult.
How Does Whole Life Insurance Work?
Whole life insurance policyholders have to pay premiums for their policy, which can be done monthly, or annually. The premiums typically stay the same year after year – which is one of the good things about whole life insurance.
In the event of the policyholder’s death, a beneficiary (that could be a spouse, a business partner, kids, a trust, a friend, etc.), will receive the death benefit. The policyholder is the one who gets to decide who the beneficiary is.
The death benefit is the amount of the purchased coverage. For example, if your insurance policy has $250,000 coverage, that’s how much the death benefit will be.
A portion of the premiums goes into the savings account which the insurance company holds. This is the policy’s “cash value.” You can use it to buy more coverage, borrow money against it, or surrender the policy for cash.
A word of warning here – if you don’t repay a loan, your death benefit will be reduced and if will disappear if you surrender the policy.
What Are The Types of Whole Life Insurance?
There are several different variations of whole life insurance policies, but here are the most common types:
Level Premium Whole Life Insurance
This policy offers premiums that will not increase or decrease over time.
Limited Payment Whole Life Insurance
You’ll get life protection by making a limited number of premium payments (for example, for 10 or 20 years). This can also be based on the policyholder’s age – for example, you can buy a policy that’s fully paid by age 65.
Single Premium Whole Life Insurance
You’ll pay a single, relatively large premium when issuing your policy – and this will provide immediate cash value. This policy is quite useful for seniors – but not that great for young people who may not have a large sum like that to spare.
Indeterminate Premium Whole Life Insurance
Typically, you’ll pay a lower premium when you start, and the rate will be guaranteed for several years. After that, it may vary from year to year.
High Early Cash Value Whole Life Insurance
Now, this is a bit complicated, but to put it simply – high early cash value policies use a paid-up additions rider, through which much of your annual premium goes to the purchase of paid-up additions. These additions increase the death benefit and the cash value.
Who Is Whole Life Insurance Best For?
Before taking out whole life insurance, it’s important to be sure that it’s definitely the best option for you. It is more expensive – and for life – so you should be confident it is what you want to be investing your money in long-term.
Whole life insurance is ideal for you if you don’t mind paying more, want coverage that lasts your entire life, and want to be able to save as you pay your premiums.
With whole life insurance, there are no surprises. Your premiums will stay the same, and you’ll get a guaranteed return on the policy’s cash value. So, if you don’t want to worry about life insurance ever running out – this would be a good option.
That said, term life insurance, which expires after a length of time but has no cash value, is more common than whole life and fits the bill for most people. So if you’re looking for “pure” insurance option that’s more affordable and comes without any bells and whistles – term life insurance is probably a better choice for you.
How Much Whole Life Insurance Do I Need?
How much life insurance you need will depend on a few different factors, such as your income, your debts, whether you have any dependents – and what kind of support you would like your family to get if you unexpectedly die.
While knowing exactly how much life insurance you will need is tricky, you can get a reasonably accurate estimate by looking at things like:
- Your Debts: Student loan debt, Credit Card debts, Mortgage, etc.
- The Length of Time: How long you’d like to support your family for
Add up all your debts, then think about the support you currently provide to your family and the support you’d like them to receive after your death. That should give you a better idea of how much life insurance you need.
Also, don’t forget to factor in the end-of-life costs. Funerals can be costly, and just to be safe, I’d probably factor in at least $7,000 for that.
A less complicated way to calculate how much whole life insurance you need it is by taking your current income and multiplying it by 10. It’s not the best because it’s a little outdated – but it could provide an estimate if you’re struggling to work out how much life insurance you need otherwise.
Finally, have a think about riders – or features you can add to your insurance policy. Examples of riders include a waiver of the cost of insurance or chronic illness rider. A waiver of the cost of insurance will cover the cost of the insurance if you get seriously ill, while the chronic illness rider will allow you to access some of the death benefit if you become chronically ill.
These, of course, come at an extra cost – so only get them if you actually need them.
Pros and Cons of Whole Life Insurance
To sum up, here are the good (and the not-so-good) things about whole life insurance:
- It doesn’t expire. While with term life insurance you will no longer be protected after your term ends, whole life insurance will provide protection for life. It will never expire, so there’s no chance that you’ll outlive the policy.
- Premiums stay the same. Level premiums provide a huge advantage. Your premiums will typically remain the same for your entire lifetime because most whole life policies are level premiums (meaning the insurance company can’t raise the prices when you get older or get sick).
- Investment component. If you want your life insurance policy to also act as an investment, then whole life insurance is a good option.
- Higher premiums. Typically, whole life insurance is significantly more expensive than term life insurance – even though the coverage is the same. That’s mainly because some of your premiums go into the cash value pot of the policy.
- Can’t be canceled. Whole life insurance is for life. Once coverage is issued, it can’t be canceled – except if you don’t pay your premiums or commit fraud. While it provides a degree of certainty – it’s also quite a big commitment.
- Can be complicated. Whole life insurance comes with a lot of extras and can be a little confusing. Knowing the terminology, understanding your cash value, and all that stuff requires a time investment.
Is Whole Life Insurance Best For Your Needs?
Whole life insurance is a good option for those who want to get life insurance once and don’t want to worry about it ever again – because it is for life.
However, because it is more expensive than term life insurance and comes with quite a few bells and whistles, do a bit of thinking and maybe speak to an advisor before you get it to make sure it is the right option for you.
After all, it’s a commitment for life – so you want to make sure that you’re signing up for something you’ve carefully considered.