In the world of insurance, there are all sorts of products to choose from to protect yourself and your family in case something bad happens.
One kind of insurance you might have never heard of before is called whole life insurance and it serves a very different purpose than term life insurance or even health insurance.
This article will help you understand what whole life insurance is, how it works, who should consider it, and why you should think carefully about buying whole life coverage (or not).
What you should know about whole life insurance
The world of financial planning can be complicated and confusing.
Whether you’re trying to save for retirement or for your kid’s college tuition, it’s a good idea to get educated on your options.
As with many things in personal finance, there are both pros and cons to consider when purchasing whole life insurance.
The first thing to consider is whether this type of insurance is appropriate for your particular situation and goals.
For example, if you’re saving up for retirement, it might make more sense to invest the money that would have gone towards premiums into a well diversified portfolio instead.
If you have dependents who depend on your income and are concerned about leaving behind an inheritance if something were to happen to you, then whole life may make more sense for you.
Keep in mind that even if someone else inherits your policy, they’ll need to continue paying the premiums until they reach age 65.
If you just want to purchase life insurance because you like the idea of having extra protection for yourself and your family without necessarily investing the money away, then term life may be a better option.
The Pros of Whole Life Insurance
Whole Life Insurance is a type of permanent insurance that lasts for the entirety of your life and pays a death benefit to your beneficiaries.
This type of coverage is often used as part of someone’s estate planning because it helps protect assets from being subject to estate taxes.
It also provides tax-free cash value accumulation during your lifetime.
You can borrow against this accumulated cash value at any time, usually at a set interest rate called the premium rate.
You may choose to use these funds for retirement income, or use them now to fund projects that require capital.
Withdrawals are taxable, but if taken before age 59 1/2 they incur an additional 10% federal penalty tax. Another plus is that this type of policy does not expire.
However, premiums do increase as you age.
Another drawback might be that most policies come with a large surrender charge (up to 10%).
If the policyholder cancels within the first few years and doesn’t take out enough money to make up for it (which they wouldn’t have done if they researched their needs).
People considering a whole life insurance policy should also look at how much income tax they pay on withdrawal.
If you’re in the 25% bracket, then withdrawing $5,000 would cost $1,250 in taxes (25%).
If you withdraw more than $5,000 per year to cover living expenses while working, then there’s a chance you’ll be better off with other options like 401k loans and Roth IRAs.
The Cons of Whole Life Insurance
Whole life insurance is a term that can seem pretty intimidating.
If you have never had an experience with it before, it can be hard to tell what is true and what isn’t.
But don’t fret! We are here to help.
One of the most common misconceptions about whole life insurance is that it is a permanent investment because it offers a guaranteed death benefit and cash value accumulation.
However, just like any other product on the market today, there are both pros and cons.
The whole life insurance company has complete control over the premiums and interest rates.
These rates will usually increase over time, which means your policy could become more expensive as time goes on.
You may find that this particular type of life insurance is not right for you if you plan to stop working or if you need to use some or all of your savings for other purposes.
However, if these things do not apply to you then this may be a good option for your finances.
Another negative aspect of whole life insurance is that once you choose a rate for your policy, that rate cannot be changed until the end of the contract.
On top of this, there are also several fees associated with getting coverage from a company.
While these fees vary from one person to another and depend on how long someone’s policy lasts (from 5-30 years), they can still accumulate quickly.
Furthermore, if you have credit card debt or student loans, many companies require that you pay off those debts first before issuing coverage.
The Bottom Line
Whole life insurance is an investment that can be used to provide for your family or loved ones if you die.
This type of policy includes both death benefits as well as cash value accumulation.
While this coverage does have its benefits, there are also some potential drawbacks to consider.
The average annual cost for a 30-year old male with a $500,000 term life policy would be $150.
The same 30-year old male would pay $740 annually for a 30-year old female with the same amount of term life insurance protection.
There are two major differences between these policies: first, females typically live longer than males and second, females typically have less income.
For this reason, many financial experts suggest taking out less coverage on the back end (i.e., lower amounts).
So that more money will remain after premiums have been paid out over time for expenses such as retirement savings or education costs for children.