Do You Really Need Whole Life Insurance

March 22, 2018

 
 

We understand how hard it is to keep up with the different types of insurance covers and especially when so much convoluted language is used. In this article we take a look at whole life insurance, and whether it is a necessity that you should bother with.

Definition of Whole Life Insurance

Whole life insurance is a policy that is created to provide financial protection for organizations or people that you leave behind in the event of your death.

Whole life insurance is also known as cash value life insurance and is a type of permanent life insurance that is one of two types of life insurance covers you can take. The other type of life insurance is known as term life insurance which matures after a set number of years. A term life insurance is cheaper as it provides a death benefit only while whole life insurance costs more because it includes an extra savings also known as cash value.

The “cash value” component of a whole life insurance policy is a savings account which is injected with a percentage of the premiums you pay. Your insurer is then required to pay interest on whatever money that is in the savings account.

The interest is usually a portion (dividend) of the insurance company’s annual profits, however, many insurance companies actually guarantee a minimum annual return.

How It Works

To understand whole life insurance, let us examine its three major components:

Death Benefit

This refers to the money that the insurance company pays out to your beneficiaries when you die. For instance, let us say you purchase whole life insurance with $500,000 in coverage when you pass away your beneficiaries will receive the full $500,000 as it’s not tax deductible.

Beneficiary

This refers to the person or organization that receives the payout from the insurance company. The beneficiary can be a variety of individuals such as your kids, spouse, business partner, trust, non-profit, friend as well as other legal relationships. You are permitted to name more than one beneficiary.

Premiums

This refers to how the insured pays for their insurance policy. Premiums can either be paid on a monthly or annual basis.

Whole life insurance lasts the length of your lifetime, that is, as long as you keep paying the premiums. What that means is that if you take a whole life insurance at 30 and die at a ripe old age of 90, your beneficiaries will receive the death benefit.

How The Savings Account Component Works

A percentage of your whole life insurance premiums funds your saving account every year. This adds to your policy’s cash value.

Your savings account earns interest on annual basis that is derived from the insurance company’s profits. You need to be aware though that the returns are relatively low compared to other types of investments. This is due to additional expenses such as underwriting costs and administration expenses.

As your accrued savings increase, the term life component decreases. In the end, the cash value replaces the term component of your whole life insurance policy. In order to get the cash value of your whole life component you can cancel your insurance policy.

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