Unlike term life insurance, whole life insurance is a type of permanent life protection that is designed to pay a death benefit to the insured’s beneficiary regardless of when he dies. As long as the premium payments are made, the policy will never lapse or cancel.
Features and Advantages of Whole Life Insurance
- Whole life insurance provides a guaranteed death benefit to the insured’s beneficiaries. The death benefit paid out is most often free on any income taxation.
- The premium for a whole life policy is a set amount that remains the same throughout the life of the contract. It is guaranteed to never increase.
- Whole life insurance policies build up a cash value that grows tax deferred and can be borrowed against for loans or other emergency uses.
- Proceeds from a whole life insurance policy, paid to an insured or a beneficiary, generally cannot be seized or claimed to satisfy an unsecured debt. Read also: What is the Difference Between Term and Whole Life Insurance?
Disadvantages of Whole Life Insurance
- Because of the investment feature, the premium for a whole life insurance is initially higher than term insurance.
- Whole life insurance policies normally provide a low to moderate return on investment.
- Borrowing against the cash value available from a whole life policy may reduce the death benefits paid to the insured’s beneficiaries.
- The cash value of a whole life policy is not paid in addition to the death benefits at the insured's time of death.
General Uses of Whole Life Insurance
- Whole life insurance is often purchased to provide an estate for the insured’s beneficiaries. When time or other circumstances have inhibited the insured from accumulating enough assets to properly care for his loved ones after his dies, a whole life insurance policy steps in and provides the insured’s beneficiaries with a lump sum payment that can be used to ensure their standard of living is not compromised.
- Proceeds from a whole life insurance policy can be used to pay estate taxes. Due to the current exemption rules, very few estates will be subject to estate taxes in 2010. In 2011 though, according to Bloomberg.com, the tax rate for estates will be 55% on every dollar in excess of $1 million per individual.
- Business owners often buy whole life insurance on their partners. Whole life insurance provides ready cash that can be used to purchase the deceased partner’s share from his estate after his death. Read also: How To Protect Your Retirement Savings With Whole Life Insurance.
Determining How Much Whole Life Insurance is Needed
There are three basic methods used to determine the amount of whole life insurance someone will need; the income needs method, using a multiple of the insured’s gross earnings and simply guessing at an amount based on what one thinks they need. The most accurate way to determine the proper amount of whole life insurance needed is the income needs analysis. This method uses a detailed fact finding sheet that includes questions about last expenses, personal bills, unpaid mortgage balance, educational funds and readjustment income for survivors to help cover extra ordinary expenses immediately after the insured dies.
Purchasing whole life insurance helps ensure that an insured can financially provide for his loved ones even after his death. Life insurance isn’t purchased to protect the insured; it is purchased to protect the ones he loves.