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Whole life insurance: What you need to know

By Posted : December 3, 2019

If you're looking for a way to help guarantee your family's financial future, whole life insurance is one option to ensure the receive benefits when you die. Plus, whole life builds cash value, which lets you tap into your policy while you're still alive. 

Whole life insurance is one of the four main types of permanent life insurance. It provides coverage as long as you pay the premiums or until you pass away. That's different than term life, which is only for a period, such as 20 or 30 years. 

Whole life premiums remain the same every year. Let's take a look at whole life insurance. 

How whole life differs from term life insurance

Most people would rather not think of their own mortality. However, life events, such as getting married or having a child, gets people to think about providing for loved ones. That includes life insurance

Two possible choices are whole life insurance policy or a term life insurance policy. It can be a challenge to determine the best course for you and your family.

Here are the differences: 

  • A whole life insurance policy costs more than term life – usually a lot more – because you're not only paying the premium on the insurance policy. You're also paying to build up cash value for the policy, which typically earns a fixed, guaranteed rate of return. The cash value accumulates on a tax-deferred basis.
  • Unlike whole life insurance, which is designed to last a lifetime, term life covers you for a certain period of time, such as 20 or 30 years. If you die during the policy's term, the insurer will pay your beneficiaries the policy's face value. However, if you die after the term, your beneficiaries get nothing.

That means if you purchase a $500,000 term policy that lasts for 20 years and you die after 15 years, your beneficiaries would get the $500,000 tax-free. If you die after 21 years, they won't receive a thing.

And if you want to renew a term life policy after that 20 years, you'll pay a higher premium because of your age. You might not be able to buy a policy at all if you're in ill health. 

Once you buy a whole life policy, you're set for life. Unless you fail to pay your premiums, it doesn't expire and can't be revoked.

Does whole life require a medical exam?

A whole life insurance policy typically requires a medical exam. The exam reviews your height, weight and medical history. It also includes blood and urine tests for specific medical problems.

The exam may result in a higher premium or the life insurance company may refuse to insure you at all.

If you smoke, you will pay more for a policy than someone who doesn’t. Blood tests will reveal the presence of nicotine.

If you have a medical condition that prevents you from finding whole life insurance, you might look into a guaranteed issue term life insurance, also known as "quick issue" or "simplified issue." You pay a higher premium because no medical exam is required, and there may be a waiting period before the policy will pay.

Whole life builds value

Whole life insurance has both a face value and a cash value. The policy's face value is what your beneficiaries receive when you die. So if you have a $500,000 policy, they'll receive $500,000 at your death.

The cash value is the amount that accumulates in a tax-deferred account. Some types of whole life policies also pay dividends.

If you're cash-strapped, you're allowed to borrow against the money that accumulates with a whole life policy and you won't face any credit checks. But if you've taken out a loan and it hasn't been paid back by the time you die, your beneficiaries will be paid a lower death benefit by your insurance company.

You're also allowed to surrender a whole life insurance policy for its cash value, so if an emergency crops up, you'll have that as a source of funds to tap into.

In many cases, you'll also be able to add an accelerated death benefit rider at no cost or minimal cost to your whole life policy, so you can have access to your death benefit if you become terminally ill or chronically ill. But you need to keep in mind that the amount paid to your beneficiaries when you die will be reduced by the amount you use.

Term or whole life insurance? 

Despite the access to cash, many experts argue that purchasing whole life insurance isn't worth the cost. They point to the higher premiums compared to term life insurance. Instead, they suggest you purchase a term policy with its lower premiums and find a safe way to invest the extra cash.

However, here's when a whole life policy might be better for you:

  • You want to make sure your loved ones are covered. 
  • You want to add riders to your policy. 
  • You want to tap into your policy's cash value while you're alive. 

If you're still unsure, remember that many term life insurance policies offer a conversion feature. This option will allow you to change the term life policy to a permanent life policy, either during a set period or at any point in the term. Some policies even allow you to credit some of the term premiums you've already paid toward your permanent life insurance policy.

Additional reporting by Susan Ladika

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