What is Whole Life Insurance?
Whole life insurance is meant to be kept in force throughout your entire life. An important feature of whole life insurance is the accumulation of cash value. The cash value is the cash available to borrow against the policy, or the value of the policy paid to the policy owner when the contract is surrendered before maturity. Any withdrawal of cash value is treated as a policy loan and interest accumulates based on the loan amount. If you do not pay back the loan, the death benefit is reduced by the outstanding loan amount.
When most people think of life insurance, they think of a traditional whole life policy. These are certainly the simplest policies to understand: You pay a fixed premium every year based on your age and other factors, you earn interest on the policy’s cash value as the years roll by, and your beneficiaries get a fixed benefit after you die. Whole life policies are for insurance buyers who want permanent, fixed premium insurance. You pay the premium, get a death benefit, and earn tax-deferred interest at a reasonable rate, mush like a long term bond. The policy remains unchanged for life and, if you live that long, endows age 95 or 100. The cash value will provide an extra source of retirement money. Since the policy is whole life, it must offer the option of not paying premiums by using the cash value to buy a smaller ‘paid up’ policy.
Whole life insurance provides protection as well as a cash value. The premiums remain at a fixed level for the duration of the contract. Over time, the policy generally builds up cash value on a tax-deferred basis. Many companies pay policyholders a dividend. Dividends provide both flexibility and increased value to your life insurance policy. They can add more coverage to your overall insurance benefit and can build a sizable cash value. You may prefer this type of coverage since the cash value can benefit you while you’re still alive. You can use it to supplement retirement funds or help provide for a child’s education – it’s your money to use as you need. You should, however, keep in mind that life insurance should not be purchased solely for accumulation. Its primary purpose is protection. Also, withdrawals and/or loans will decrease the death benefit.
