What is Whole Life Insurance

What is whole life insurance and how does it work? This is a question you are probably going to be asking yourself at some point as you shop for a life insurance plan. Life insurance is critically important if there are others who depend on you financially, and the older you get, the more important it is to make sure that your family will be protected in case of your death. Unlike other types of insurance, whole life insurance can also double as an investment.

Why Is It Important?

Whole life insurance is also called “whole of life assurance” (if you live in the Commonwealth). Unlike term life insurance policies, which only provide you with coverage for a certain time period, whole life insurance is meant to cover you for your whole life. A term policy might only cover you for 20 or 30 years (which may still be sufficient, depending on your age and that of your dependents), but a whole life policy will protect your dependents for the rest of your life. Additionally, whole life insurance actually provides you with an additional “cash value.” You have the choice to cash out a percentage of the money you have invested into your life insurance account if you should need it, while you’re still alive.

Types of Whole Life Insurance

There are three basic types of whole life insurance: universal, variable life, and variable universal. A universal whole life insurance policy requires that you pay a premium each month. Part of the premium goes toward a benefit which will be available to your dependents should you die. That part is inaccessible to you. The other part is saved or invested in a low-risk vehicle, and is available to you to borrow against or cash out if you need it later.

The second type of policy, variable life insurance, emphasizes the “investment” part of the plan. The majority of the premium, and not just a small part of it, goes toward one or more investment vehicles chosen by the insurance companies. The advantage is that you may end up with more money later, but the disadvantage is of course the risk that you might end up with less. The death benefits are dependent on the investment outcome, unless you pay extra to guarantee the amount of the death benefits.

The third type is called variable universal life insurance, and as the name implies, it is a sort of blend between the other two. The death benefit amount is set in stone, and the rest may be invested. The insurance company will offer you some choices as to what you invest the money in. This type of policy is more flexible than universal whole life insurance, but less flexible than the variable type. It carries less risk than the variable insurance, however, which may make it a happy medium for many buyers.

Which type should you choose? That depends on your needs. If you are mainly using the life insurance as an investment vehicle, you might prefer the variable or variable universal type of coverage. If your main purpose is to insure your loved ones should you pass away, it makes more sense to get universal or variable universal coverage.

Benefits of Whole Life Insurance

What are the general advantages over the various types of universal coverage over term life insurance? For one thing, your beneficiaries are covered for the rest of your lifetime, no matter how long that is. Term policies are only good for a few decades. If you are young or very healthy and you expect to live longer than 20 to 30 years, a term policy may be too brief.

The other main advantage of whole life insurance is its use as an investment vehicle. This doesn’t apply with term coverage. When you get term life insurance, only your beneficiary can withdraw, and only in the event that you actually die. Whole life insurance has cash value you can personally draw on during the course of your life. So even if your designated beneficiaries never need to file a claim, the money is still available. Moreover, you can use a variable or variable universal insurance policy to actually make money if you invest well.

Disadvantages of Whole Life Insurance

While whole life insurance is more flexible than term insurance in many ways, it does have some drawbacks. You should always consider both the pros and cons before you choose an insurance plan. The premiums for whole life insurance cost more than the premiums for comparable term life insurance policies. If you are not in good health or you are quite old, it may not make much sense to buy whole life insurance either, because a term policy may be long enough. In that case, spending extra money on whole life insurance policies would be wasteful.

As far as the investment angle goes, if that is important to you, whole life insurance is definitely what you should choose over term life insurance, since term life insurance doesn’t offer you the cash value. Then again, life insurance in general may not be the most suitable investment vehicle. There is a limited range of choices for what you actually invest in, and the insurance company may or may not have what you need. If they do, then whole life insurance is a great choice. If not, it would be better to invest your money in something which suits you.

Should I Get Whole Life Insurance?

Making any decision about what life insurance to buy requires plenty of forethought. Before you purchase life insurance, ask yourself some basic questions about your situation:

  • How long do I expect to live, if all goes well? Am I in good health? Do I really need to cover myself for an indefinite time period, or would I save money by purchasing term life insurance?
  • Do I want to use life insurance as an investment vehicle? If so, how much power do I want over where my investment goes? Will an insurance company be able to offer me an option which will fulfill my needs? How much flexibility do I need?
  • What percentage of my insurance do I want to go toward a death benefit, and what percentage do I want to go toward investments? Is it important for me that the death benefit be guaranteed?
  • How much money do I have available to actually pay a monthly premium on whole life insurance?
  • Do I foresee myself needing or wanting to cash out or borrow against my policy at any point in the future? How financially stable am I right now? Is it important that I be able to withdraw, and not just my beneficiaries?

These questions and their answers should help you to analyze your specific needs concerning life insurance, and decide whether whole life insurance is best for you, and which type: universal, variable, or universal variable. Shop around when you look for a provider. You can save a lot of money by doing comparisons between plans and features offered by different companies, instead of taking the first plan you find. It may involve a little extra time to conduct all that research, but it will pay off by protecting you and your family!