How does whole life insurance work?

Whole life insurance is a type of life insurance that has a cash value. It’s a policy that provides protection for your entire lifetime. It offers two main benefits:

• Death benefit which will be paid to a beneficiary in the event of your passing
• A cash value that accumulates over the term of the insurance policy. It can be used sort of as a savings account. You may also borrow against if you need the money while you’re alive

Whole life insurance also known as permanent life insurance & straight life insurance.

Whole life policies will cover you for your entire life. Unlike term life which will only cover you for a specific amount of time. With whole life insurance policies, the premiums are paid into both the savings or investments and the life insurance death benefit. It’s very similar to universal life insurance which will also last your entire life.

Types of Whole Life Insurance

Below are the 3 main types of whole life insurance:

Traditional Whole Life Insurance

Traditional whole life insurance policies give you a guaranteed minimum rate of return on the cash value portion of your policy.

Interest Sensitive Whole Life Insurance

Interest-sensitive whole life insurance policies give a variable rate on your cash value portion. They are similar to an adjustable-rate mortgage. Interest-sensitive whole life insurance has more flexibility within the policy. For example you can increase your death benefit without raising your premiums. This is depending on the economy. As well as the rate of return on your cash value portion of your policy.

Single-premium Whole Life Insurance

A single-premium is for people who have a large sum of money. And with that money would like to purchase a policy upfront. Much like other whole life insurance options, single-premium whole life insurance accumulates a cash value. It also has the same tax shelter on returns, which is awesome.

Benefits of Whole Life Insurance

Benefits of a whole life insurance policy include:

• An amount of your premium money goes toward the cash value of your policy.
• You can use the savings portion of the policy to pay your policy if you start early enough.
• The premium will remain the same during the time you are covered. Unless you choose to change it.
• You have lifelong coverage with no future medical exams, unless you choose otherwise.
• It provides tax-saving opportunities while you’re alive. There are also tax savings to your estate.

Term vs. whole life insurance: cost comparison

Term life insurance comes with lower premiums because it’s temporary and has no cash value. Most of the time, your family doesn’t receive a payout. Usually because you will live to the end of the term. Whole life premiums are a lot higher. This is because the coverage lasts for your entire lifetime. The policy also has a cash value. In addition to, a guaranteed rate of investment return on a portion of the money that you pay.

Bottom line; if you need life insurance coverage for the long haul, whole / permanent life insurance is your best option. But, if you want something cheaper and short term, term life insurance may be more fitting for your lifestyle.