Is Whole Life Insurance Right for you?

What is Whole Life Insurance?

Whole life insurance is a form of permanent insurance that also builds up a cash value.  It provides permanent protection for the insured person’s entire life.  There are 5 common types of permanent life insurance policies; whole life, variable life, universal life, and variable universal life.

Whole life insurance contracts have a fixed death benefit and guaranteed cash values.  The cash value of the life insurance policy earns interest but is not invested in any of the financial markets.  It is the most conservative form of permanent life insurance.

Variable life insurance contracts allow the policy owner to invest the cash value in several select stock or mutual funds.  The premium for this type of insurance is fixed and guaranteed not to increase, but the policy does not guarantee cash values or interest rates.  It is possible to lose the entire cash value if the investments selected perform poorly.  If the cash value goes to zero, then the policy is canceled.

Universal life insurance contracts allow for flexible premiums after the first year.  This type of insurance policy is similar to variable life insurance in that the cash value can be invested in the financial markets.  However, the policy owner does not have the ability to choose those investments and as such they only bear some investment risk.  The cash value is guaranteed a minimum interest rate and death benefits can be level or increasing, depending on what the policy owner chooses.

Variable Universal life insurance is a hybrid of the variable life and universal life insurance contract.  This type of policy combines the premium flexibility offered in universal life insurance with the policy owner directed investment aspects of a variable life insurance policy.  The death benefit is dependent on the cash value of the policy and investment performance.  There are no guarantees with this type of policy.

Who would benefit most from Whole life Insurance?

Whole life insurance is usually appropriate for risk adverse individuals that want to ensure the financial security of their dependents in the event of their death, regardless of when death occurs.  As discussed earlier, other forms of permanent insurance policies exist that offer an investment feature.  Of course these policies are more risky and should not be considered by conservative individuals.

What is the downside to owning Whole Life Insurance?

Whole life insurance is very expensive when compared to term life insurance.  There are also more expenses associated with owning this type of policy, such as surrender charges.  Usually insurance companies require the policy to be in force for 10 years or sometimes longer before the surrender charges are waived.  These charges are deducted from the cash value of the policy at the time of surrender.  In some cases, the policy owner may not receive any of the accumulated cash value as the surrender charges may be higher than the actual cash value.

Is Whole Life Insurance right for you?

The decision to purchase permanent life insurance is purely individual. It is a great and most complete insurance option, it covers you for life, it’s a do it once and forget it kind of a thing. Whole Life Insurance is appropriate for a conservative financial plan however its major drawback is the high cost. Keep in mind though you do create cash value over time that you can use so that does off-set the higher premiums a little.

Personally, I own a combination of Whole Life and Term policies.  My financial plan consists of investing on a regular basis, avoiding debt, and making extra payments on the personal mortgage. My Whole Life policy is smaller and factored into my retirement planning when I figure the Cash Value and then I supplement that with Term policies to protect either Darla or myself in the event something were to happen to one of us then the Term would provide a cushion for the lost income. Essentially it is a stacked system where as our debts and expenses fall off over time so do the needed insurance policies – that would have provided protection for us if something happened to either one – finally leaving in the end a Whole Life policy with a significant Cash Value. You would DEFINITELY want to speak with a Financial Adviser like Darla before setting up a system like that.

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