25 Jan Whole Life Insurance Explained
Life insurance is one of the most important financial products you’ll ever buy, and, if you follow the crowd, that means purchasing whole life insurance.
According to U.S. News, “59 percent of U.S. individual life insurance policies issued were whole life insurance policies.”
Additionally, Insurist reports that, of the various types of permanent life insurance policies, 57% of consumers chose whole life insurance.
But, let’s be honest, even though whole life insurance is a common choice, does it mean it’s the best choice for most people?
If you’re confused by all the types of life insurance, you aren’t alone.
According to Motley Fool, “15% of Americans don’t have a life insurance policy because they don’t know which kind to get,” and “11% of Americans say that the confusing nature of life insurance has driven them to avoid buying a policy.”
What you need to know upfront is that life insurance is a financial product.
Like all other types of insurance, there are multiple types and widely varying premiums.
If you aren’t careful, you can wind up being sold a type of life insurance that doesn’t fit your unique needs.
Hence the reason it is so important to do your homework.
Keep reading for what you need to know about whole life insurance so you can determine if it’s right for you or not.
What Is Whole Life Insurance?
Whole life insurance is a type of life insurance that offers coverage for your entire lifetime if you continue to pay the premiums.
It covers death benefits up to whenever you die (or your whole life) as long as you pay the premiums.
If you die, and the policy hasn’t lapsed, the beneficiaries will receive a payment.
What sets it apart from other types of life insurance is that it offers cash value and works similarly to a savings account.
The cash value accrues interest and grows over time and can be withdrawn and used as a loan.
As a result, it is suitable for those who not only want the benefits of life insurance coverage but also plan to use the cash value as an investment vehicle.
Note – Whole life insurance is sometimes called permanent life insurance, but this isn’t the only type of permanent life insurance. There are other types of permanent life insurance, such as universal life insurance and variable life insurance.
Whole Life Insurance vs. Term Life Insurance
In contrast to whole life insurance, which lasts a lifetime, term life insurance is only designated for a certain time or number of years before it ends, such as 10, 20, or 30 years.
If you die within the term limit you purchase, a set amount of money will go to your designated beneficiary.
When your term expires, you will have to either renew your policy or get a new one to ensure your beneficiary receives money upon your death.
Term life insurance tends to be the most affordable and simplest life insurance policy.
Whole life insurance is typically much more expensive than term life insurance because of the added cash value investment.
Note – Some term life insurance policies may be converted into whole life insurance policies.
[Related Read: How Life Insurance Works: What You Need to Know]
For individuals who like having a solid game plan from day one, whole life insurance is appealing.
This is because it provides a guarantee that, no matter when you die, your beneficiaries can claim the policy’s death benefit, offering a lifetime of coverage protection.
Plus, you are guaranteed your premiums won’t increase or expire after a specific number of years, and your insurance policy can’t be canceled due to health or illness. These types of guarantees make consumers feel as if it’s a safe choice.
The ability to accumulate cash value and withdraw or use the cash value for a loan (or as an emergency savings account) is another selling point.
Additionally, it is great for estate planning as the IRS doesn’t consider death benefits as taxable income
When you are shopping for life insurance, it is important to weigh the pros and cons.
For instance, while the guarantees of whole life insurance are appealing, there are some disadvantages to be aware of.
The biggest deterrent is the high cost of whole life insurance in comparison to term life insurance.
For example, PolicyGenius performed a cost comparison for males aged 25 to 35.
They found term life insurance averages $27-$31 a month, while whole life insurance averages $350-$520 a month.
In addition, while many consumers are drawn to the idea of the accruing cash value, it can take a long time to actually build the cash value up to a usable point (depending on the guaranteed rates).
Forbes explains, “While actual growth varies from policy to policy, some take decades before the accumulated cash value exceeds the amount of premiums paid. This is because the entire premium does not go to the cash value; only a small portion. The rest goes to paying for the insurance itself and expense charges.”
It is also important to recognize that, if you plan to purchase whole life insurance as an investment vehicle, the interest rates are normally lower than other investments.
According to Consumer Reports, “The average annual rate of return on a whole life policy is 1.5%.”
[Related Read: 27 Questions to Ask Before Purchasing a Life Insurance Policy]
Why Do People Buy Whole Life Insurance?
LendEDU life insurance-focused survey of 1,000 adult Americans asked why they chose whole life insurance over term life insurance.
The survey found:
- 32% did so because it was recommended by a trusted source.
- Another 32% felt whole life insurance provided more value.
- And 27% wanted a longer-term option.
In general, it is usually purchased for the benefits of having lifelong coverage.
It is also for those who see the benefit of using the cash value as an investment vehicle or an emergency savings account.
Is It Right for You?
Purchasing any type of life insurance comes down to one question: What is your purpose for purchasing life insurance?
A 2020 survey by LIMRA and Life Happens found that people tend to purchase life insurance for the following reasons (they could choose multiple reasons in the survey):
- Burial/Final expenses: 84%
- Supplement retirement income: 57%
- Transfer wealth: 66%
- Help pay off mortgage: 50%
- Replace lost wages/income: 62%
- Home expenses: 48%
- Tax-advantaged investment: 45%
- Estate taxes: 43%
- Pay for college: 37%
- Business purposes: 28%
- Charitable gift: 27%
Looking at the numbers above, the main reason many people choose to purchase life insurance is to ease financial burdens (final expenses, replace lost wages, etc.) for their loved ones.
This is understandable.
According to Forbes, “A recent LIMRA survey found that 44% of households said they would face financial hardship within six months if the primary wage earner were to die prematurely. For 28% of households, financial hardship would hit within one month.”
[Related Read: How Much Life Insurance Do I Need?]
With that being said, if your main reason is to cover your family’s expenses if you pass away prematurely, then whole life insurance may NOT be the right policy for you.
If this is your purpose, you may be better off purchasing a term life insurance policy with a much larger death benefit due to the high costs of whole life insurance.
Remember, whole life insurance is just one of many types of life insurance policies available.
Insurance is not one-size-fits-all. Why you need life insurance will look different from your neighbor’s reason.
Shop for the life insurance you need instead of being sold life insurance that doesn’t fit your needs.