What Is Whole Life Insurance?
Whole Life is permanent life insurance designed to protect families and individuals with a smaller life insurance need.
Whole life insurance can accomplish many different goals. It can be used to guarantee insurability on a young child; it can be used to transfer wealth, free of income tax, to relatives; it can be used to pay final expenses; and it can be used to leave money to charitable organization.
How Does Whole Life Insurance Work?
Whole life is designed to last an insured’s entire life and pay out as long as an insured keeps the policy in force. This makes the cost of insurance more expensive. However, it still remains true that the younger an insured is the more affordable the rates are. Because of the higher costs, policies are typically written below a $100,000 face value; however, there are no restrictions (besides medical qualifications) on how much permanent life insurance one could purchase on themselves.
Most policies are designed to be fully paid up after a set number of years. This means that a policy owner could pay in enough money to fully fund the policy and not have to pay premiums again. Additionally, most policies are designed so that the total amount that the policy owner pays into the policy is less than the overall death benefit. Another advantage to whole life over term is the ability to build cash value that can even be borrowed against. Finally, a whole life insurance policy will pay the entire face value to a beneficiary if the insured passes away, even if the insured only pays the first month’s premium.
Who Should Buy a Whole Life Policy?
There are many different reasons someone could purchase whole life insurance.
Final expense may be the most obvious reason. Everybody will have final expenses; the benefit of a whole life policy is that your heirs will not need to be responsible for paying final expenses.
It’s also advantageous to purchase whole life insurance for a child in order to guarantee their insurability for later on in life. Here is a very common example: a family has a history of developing type 2 diabetes in adulthood. Diabetes makes it very hard to purchase life insurance. That family could purchase whole life insurance on their young children when they are clear of any diabetes symptoms. Children’s whole life insurance usually comes with guaranteed insurability riders that allow an adult child to purchase additional coverage, 5-10 times more than their current face value, without needing to prove insurability.
Another common buyer of whole life insurance is someone that looks to pass (or create) wealth to their heirs/relatives without the federal income tax implications. Most states consider life insurance to be a safeguarded asset. That means that creditors can not collect death benefit proceeds, allowing wealth to safely transfer to heirs.
What Are the Different Types of Whole Life Insurance?
Traditional Whole Life is designed to pay final expenses, transfer wealth, leave a legacy, or to do all three. Premiums are level and may eventually fully pay up the policy.
10-Pay, 15-Pay, & 20-Pay options do exactly what traditional whole life does but guarantees that the policy will be fully paid up by a certain date.
Children’s Whole Life is designed to guarantee insurability to a child so that they can purchase additional coverage in adulthood, regardless of health. In the long term, it will pay funeral costs, but this is not the initial goal of children’s whole life insurance. This is not a limitation, however, if tragedy struck, it would still pay the face value.