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An overview of whole life insurance

A whole life insurance policy is a contract that involves payment of premiums to cover both insurance and investment angles. It provides coverage that runs the duration of your life as long as you pay your premiums. A whole life insurance is vastly preferred because its coverage and cost remain unchanging and because the policy gathers cash value in the long run. When the insurance bearer dies, the insurance company pays an insurance amount that is predetermined to the beneficiaries named by the insured. The cash invested increases in value which the insured can borrow against or withdraw when necessary.

Whole life insurance gives holders of the policy the ability to collect wealth by paying regular premiums to cover the cost of the insurance. In a savings account, they also help in the growth of equity. The interest that accumulates in this account is tax-free. Whole life insurance, as the name suggests, covers the individual for his entire life. Known as traditional, permanent or straight life insurance, it is the most basic type of insurance available. People who buy whole life insurance policies include those who want to provide for their dependents post their death, pay off their business debts through liquidation, pay off mortgages or pay off debts of family members and ensure cash is available without delay for family members post the insured’s death.

Whole life insurance was very popular from 1940 to 1970. These insurance policies provided money for the family in the event of the death of the insured and helped to support retirement planning, a process that figures out retirement income goals. However, after this, the Tax Equity and Fiscal Responsibility Act (TEFRA) in 1981 came into existence and insurance companies began to get picky about their interests rates. People turned their eye towards investing in the market as opposed to life insurance where the returns were much higher. They began to invest in the stock market and term life insurance. They also began to choose term life policies. Term life is more temporary in nature as opposed to the whole life which carries with it coverage for life. In term life, the premium, after a certain time period, starts increasing till the insured can no longer afford to pay it.

A whole life insurance has a death benefit that is usually the amount stated at the signing of the policy. If the insurance is considered a participating one, the death benefit is subject to increase or decrease. It will increase if dividend values accumulate and decrease if there any policy loans that are outstanding. A rider like an accidental death benefit will increase the benefit. A whole life insurance policy matures after the death of the insured, or once the insured reaches a 100 years old. If the insured lives past 100 years, he will receive the entire sum. Recently, though, whole life insurance policies have increased the age of maturity to 120 years. This has the advantage of ensuring that the benefit remains tax-free because an endowment, that is, the cash you receive once you cross the maturity age is substantially taxed. Except in certain cases, the entire policy is tax-free. It is taxed only when there are internal profits in cash value, whether in term life or accidental death policies. If a policy cashes out before death, the procedure is different. When cash is surrendered, any profit made beyond the premiums paid will be taxable. The same thing applies in case of a matured endowment. To combat this, people take cash values out as a loan instead of a surrender against the death benefit. As long as the policy is active, an amount taken as a loan will be tax-free.

People find whole life insurance more attractive because of how long it provides the coverage. It is the go-to policy for any permanent insurance needs such as funeral expenses, estate planning, surviving spousal income and complementary retirement income. However, because of its relatively high premiums, people may find it less appealing when they want an insurance policy for huge debts, temporary needs like young children, and relatively new families struggling with a limited income and many needs. Whole life insurance policies are also useful for business purposes such as to fund a buy and sell agreement, the death of an important partner or person in the business, for a supplemental executive retirement plan or for deferred compensation.

Level premium whole life insurance or ordinary whole life insurance, as the name suggests, provides life coverage for high premiums. Whole life insurance is better for a person than term life in terms of value when the person requires an insurance that runs for ten to fifteen years at least due to favorable tax treatment. The benefits of a whole life insurance are that death benefits are assured as are cash values. Whole life insurance also offers stable and predictable premiums along with mortality charges and expenses that do not affect the value of the policy.

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