Whole Life Insurance
Whole Life Insurance is a form of Permanent Life Insurance that provides lifetime protection for as long as the premiums are paid. In some cases, whole life policies are designed to mature at age 100, which is the age when premium payments would end and the cash value would equal the face amount of the policy. At maturity, the face amount of the policy would be paid to an insured person who is still living.
Whole life insurance may be used as a form of investment, as it accrues interest over time. With whole life insurance you can receive dividends from your insurer, which you can then use to offset the cost of your policy, to increase the amount of your coverage, or even to buy a supplemental term life policy.
To better understand the difference between whole and term life insurance, please review Term Life vs. Whole Life Insurance -- What is the Difference?
Whole Life Policy Premiums
Whole life policy premiums are divided into two parts: Death Benefit and Cash Value Account.
Death Benefit: Part of the premium in a whole life policy is used to cover the cost of the death benefit coverage over the insured person’s lifetime. The so-called "death benefit" refers to the amount of money paid or due to be paid when a person insured under a life insurance policy dies. This is paid directly to the beneficiaries of the insured.
Cash Value Account: The other part of a whole life policy is used to build a cash value account, which is paid to the beneficiary upon the death of the policyholder in addition to the death benefit. The interest accrued by the cash value account, usually at a fixed rate, is comparable to that of a savings account. This money can usually be borrowed against or withdrawn in times of need or emergency--one of the things that make a whole life policy attractive to prospective buyers. However, the money is not available right away; policyholders must wait for the cash value account to accumulate to a certain amount before they can borrow against or withdraw it. They must also not exceed the limits of the policy, or it will become forfeit and all coverage will be cancelled.
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Tax Benefits of Whole Life
Any money accrued under a whole life policy is not subject to taxation as long as the policy is in effect, and any money you borrow or withdraw up to the amount of the premium is also tax-free.
If you cancel the policy at any point, you receive a lump sum of money stored in the cash value account - including interest! You pay taxes only if the cash value plus interest exceeds the sum of premiums paid.
Cancelling (or "surrendering") a policy is a good option for retired persons who have paid off their mortgage and are free of dependents. They can then use the money in other investments--which would provide a stream of income--or spend it as they please.
The cash value account is, in effect, a forced savings account, which is very appealing to consumers. To keep your policy you must pay the premiums, and as a result you are putting money into savings instead of spending it elsewhere. Whole life policies are thought of as a low-yield investment, but their level of security over other financial ventures are something to consider when looking into coverage. Premiums are indeed higher than those of term life policies, which may be a drawback, but the returns can be greater.
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