Whole Life Insurance
Whole life insurance is the first kind of permanent insurance. This policy gives you coverage for your entire life. The premium is fixed and is based on the age at which you begin the policy. Since the premium is fixed, it is more expensive than term insurance in the beginning, and less expensive later on. They basically take a curve and make it into a straight line, making your premium the same amount every month.
Like all forms of permanent insurance, there is a cash value attached to a whole life insurance policy. This value comes from the extra money you pay (as opposed to a lower term insurance payment) plus any interest you earn on the account. A nice thing about this policy is that you are allowed to borrow against the cash value of your insurance policy. If for some reason you die before you are able to pay back the loan in its entirety, then the benefit paid out on behalf of your policy is less. Whatever is left on the loan plus interest is taken away from the initial face value of the policy. Again, though, if you were to invest this extra money (the difference between a permanent policy and a term policy) in some other way such as stocks or bonds, then your return rate would most likely be higher and you would still be able to borrow or spend the money that is invested.
If you fall behind on payments, you can use the value of your policy to get caught up with your payments. You can also convert a whole life policy to term insurance. If you cancel the policy, any cash value is that the policy is worth is still owed to you. You can purchase an annuity with this credit, which will pay you out in monthly payments over a fixed period of time, or you can receive on lump sum payment.
There are forms of whole life insurance that aren’t really permanent at all. Instead of paying for the rest of your life, you pay for a set amount of time. This is usually in 5 year increments, and 10 or 20 are the most common. However, when you buy policies that have shorter lives, the premiums are generally higher.
Whole life insurance does have its advantages. The interest you earn on a policy is tax free if you don’t ever remove the cash value from the policy. Loans are relatively cheap when taken from the cash value of the policy.
Any outstanding loans on your policy will be taken from the cash value to be paid to your beneficiary when you die.
The interest rate on the cash value of a whole life insurance policy is usually low relative to the current market. Cash value is slow to accrue, and cancellation of the policy after only a few years will result in little gained cash value, hardly worth paying the high premiums.
If you do not with to monitor your funds or if you have no desire at all for risk of any kind, then whole life is a good option.
