Whole life insurance is a type of permanent life insurance that remains in force as long as premiums are paid according to contract terms and provide both a death benefit and cash value.
A Type of Permanent Life Insurance
Whole life is one type of permanent life insurance that covers an insured for their lifetime. It is considered the original type of life insurance.
Other types of permanent life insurance policies include universal life, indexed universal life, and variable universal life. Term life insurance is considered temporary insurance.
As permanent life insurance, the whole life policy provides a death benefit as long as the policyholder meets the contractual agreements for paying the policy premiums. If the policy is paid up, the coverage lasts a lifetime.
Understanding Whole Life Insurance
Whole life is an insurance contract. The insurance carrier guarantees that a death benefit will be paid on the life of the insured as long as the premiums are paid by the policyholder. The policyholder and the insured can be the same person, and often are, but this isn’t required. For example, a wife can own the policy of her husband.
The insurance premium is used to pay for the cost of insurance, administrative costs, and a portion is set aside for the cash value. The cash value portion of the policy earns interest. There is a minimum guaranteed interest rate that the policy can earn though it can be higher in periods where interest rates are higher.
Policyholders are able to borrow against the cash value as a personal loan. Usually, they can borrow up to 50% of the cash value amount. Should the insured die prior to the loan being repaid, the amount of the loan would be subtracted from the death benefit.
The cash value does not fluctuate because it is not tied to the stock market as it would be in another type of permanent policy, variable universal life. As such, whole life is considered a conservative option when it comes to permanent insurance. Premiums also remain level throughout the policy which is what makes it different from universal life policies.
Whole Life vs. Term Life Insurance
Whole life insurance is different than term life insurance. Whole life covers a person for their entire life while term life only covers you for a designated period of time. Whole life insurance is more expensive than term life and also has cash value that earns interest where term life doesn’t.
Can You Have Whole Life Insurance Paid Up?
It is possible to have a life insurance policy where you don’t make payments for the rest of the insured’s life. These paid up whole life policies have you pay a higher premium for a set period of time to cover the costs of the insurance for the lifetime.
There are policies that will allow you to pay up the policy in 10, 15, or 20 years. Some set the premiums to end at the retirement age of 65. Essentially, you pay the premium for this term and the policy is in effect for the remainder of the insured’s life. These policies also increase the cash value faster since there is more money to earn interest in the account sooner.
This type of policy is ideal for someone who can afford the higher premium payments who doesn’t want to have to worry about ongoing payments in the future. It is also used in a lot of estate planning strategies.
Cost of Whole Life Insurance
The cost of a whole life insurance policy will depend on several factors that include the age, health, and gender of the insured along with the amount being sought in coverage. Because whole life insurance guarantees a death benefit for a lifetime and has a cash value, it is more expensive than term life insurance. On average, expect to pay two to three times the amount you’d pay on term insurance. The younger you start a whole life policy, the less your premiums will be for the remainder of your life.