Who Needs Whole Life Insurance?

For younger and well off families, whole life insurance can be a smart investment. Every person has their own set of preferences and variables of coverages they need and that’ll affect the kind of policy and amount of coverage you look at. Until recently, the majority of people have seen whole and term life insurance as something that only applies to individuals under the age of 30. Whole life insurance has grown in popularity, and many people want to know what is whole life insurance and whether it is a safe investment. 

The individuals that are interested in whole life insurance are often in their late twenties or early thirties and beginning the process of starting families and settling down. These people are often the same individuals who are starting to have an interest in learning about life insurance options – and understandably so. At some point or another, they have more then likely come across the terms, or had friends or family suggest that they should do research into life insurance and that can be a very good thing for those individuals.

For most people, whole life insurance may feel like an appealing option. What’s not to like? A policyholder is guaranteed to receive a cash value that they can access while they are still living. while some people may have also read that they need to take great caution regarding whole life insurance. For these reasons, confusion may arise, and that requires answers. 

When shopping for policies, you will find that certain insurance companies give you the option of buying either term or whole life insurance. Often these same companies offer whole and term life insurance options without requiring a medical examination, which is the best option for hose who already have underlying health issues. While term life insurance is much more common, there are certain cases in which a whole life policy makes more sense. In today’s world, it is cheaper than ever to buy life insurance, making it more affordable to the everyday man. It is advised that you do your research first to ensure you are making the best decision possible. 

What is Whole Life Insurance?

There are two forms of life insurance, which are: 

1. Term Life Insurance 
2. Permanent Life Insurance (Whole Life)

Term Life Insurance

Term life insurance is more transparent, because the principle is closer to that of auto or home insurance. 

Term life insurance protects the families for a set period of time for which you pay premiums either monthly or annually. Term life insurance can be obtained for 1 to 30 years. For healthier individuals under the age of 50, term life insurance is relatively inexpensive, but it gradually becomes more costly as you get older.

Term life insurance requires you to pay premiums for a set period of time (between 1 to 30 years). During this time, the insurer provides a benefit to the beneficiaries if the insured were to pass at any point during the designated term of the policy. However, term insurance is similar to auto insurance in that once you stop payments on your premiums, you will lose the coverage, cancelling your benefits. What sets term life insurance apart from most types of insurance is that you only pay premiums for a set amount of time.

The biggest distinction between term and whole life insurance is that after the covered person dies, then the death benefit is paid out to the insureds family to cover funeral and burial costs, while whole life has a cash value that will be paid out as almost an additional chunk of the death benefit or can be taken used while the insure is still alive.

Whole Life Insurance

After the financial crisis in 2008 and 2009, whole life insurance became more common as a way to provide additional financial security. Whole life insurance falls under the permanent life insurance umbrella. Permanent life insurance comes in three forms:

1. Whole Life Insurance
2. Variable Life Insurance
3. Universal Life Insurance

Whole life insurance has a cash value component (which adds to the higher cost) that term life insurance does not. This ensures that any of the amount you spend in insurance premiums will be used to invest from or cash out over your lifetime. When you buy whole life insurance, the insurer estimates the cash value of the premium (minus insurance premiums and other expenses). 

As a result, whole life insurance will help you build up cash value (which is tax-deferred) and spend it when you need it. You can withdraw some – if not all – of the money you have put into it tax-free as long as you pay premiums according to government guidelines. Whole life insurance has consistent premiums rates and life insurance coverage for the remainder of your life; so long as you pay your premiums on time of course. 

When you buy permanent life insurance, your coverage lasts as long as you pay your premiums. Moreover, some of the money you spend in insurance builds up as a cash benefit. You can use the cash value to augment your retirement income, and you can also borrow against it. The key distinction between whole life and universal life insurance is that whole life insurance premiums are fixed for life, while universal life insurance premiums and death benefits can be changed if desired. 

With whole life insurance, if you are paying your fees, some of the money you’ve spent is yours to use after a certain amount of years. This is referred to as the cash value of the policy. Whole life insurance should be a simple sale for insurers. Nobody loves “throwing money away” on life insurance they may never use. That said, the idea of merging life insurance plans with a tax-deferred cash benefit accumulation plan is attractive. You’re no longer “throwing money away” because you can take out and use that cash value when you need it.

Pros and Cons of Whole Life Insurance

Pros

• Guaranteed partial return on investment (money paid on premiums)
• Fixed premium rates
• Cash value builds overtime – you can borrow against or withdraw before death

Cons

• Return on investment is not guaranteed to equal amount of money paid in
• Premiums are expensive
• Policy terms and plans can be difficult to comprehend without expert advice from an agent

When Might You Require Life Insurance

If you’re like the majority of people, you do not  necessarily need life insurance until you’ve had children, bought a house or gotten married. One of the most popular uses of life insurance is to replace the money, for those who rely on you and your income, in the event of your death. Before you have children you will want to have life insurance for you and your partner. However, there are only a few instances in which young, unmarried adults need life insurance. Even then, some financial advisors will still try to sell you a policy you don’t need if they can. 

The following is an example of someone who should consider life insurance:

If you graduated with large student loan payments that a parent cosigned, you or your parent might choose to get a life insurance policy on you to offset the balance of the loans. In this situation, you will want to choose only enough term life insurance to offset the unpaid liability. This policy can be dirt cheap because you are in your early twenties. 

Do your best to avoid insurance policies that are specifically intended to pay off your debts, because life insurance isn’t a bank loan. keep in mind that you only need insurance if you have cosigners on your loans. A relative cannot be held legally responsible for your payments if you are the sole signer of your loans and you pass, instead your estate and assets will be taken as payment for those loans. 

When Does it Make Sense to Purchase Whole Life Insurance?

With whole life insurance, the cash value accounts are paying about six percent interest before taxes. The prevailing opinion has been that you would be better off investing in a mutual fund on your own in the long run. However, with the market’s recent uncertainty, some buyers might be skeptical. Nevertheless, you must weigh the policy’s fees and commissions before agreeing that whole life insurance is a reasonable choice. 

According to these estimates, an agent may receive 30 to 40 percent of a term life insurance policy’s first-year premium. That said, they might receive 80 to 100 percent of a whole life insurance policy’s first-year premium. But remember, whole life insurance might have premiums that are 10 times as much as term life insurance. For this reason alone, it’s enough to avoid whole life insurance. 

With the high cost of whole life insurance and the fact that many people do not need coverage for the rest of their lives, it is often not the only option. There are, however, certain circumstances under which permanent life insurance makes sense. 

Funding a Trust – Permanent life insurance can be used to finance a trust that will provide for your children until you pass away. 

Paying Estate Taxes – Whole life insurance can be useful when it comes to estate planning. This method is meant for affluent individuals in their 30s and 40s who have the ability to set up an insurance trust using the proceeds of the policy to cover estate taxes and then transfer the trust over to beneficiaries. If your estate is worth more than the new estate tax exemption, which is $11,580,000 in 2020, lifetime life insurance could be a smart option to help your descendants cover any estate taxes you owe.

Funding a Buy-Sell Agreement: If you are a co-business owner, you whole life insurance may be something to consider in order to provide funding to purchase one another’s business shares in the event a death occurs. 

In Summary 

Listed below are some questions you can ask yourself to decide whether whole life insurance is right for you.

1. Do you need life insurance that covers you for more than 30 years?

It does not make sense to invest into whole life insurance if the situation you want to cover has a finite end. 

Alternative Insurance Option: Term life insurance is an option that is useful for covering particular debts and time spans. Term life insurance, for example, is a safe option if you need life insurance for 20 years when paying off a mortgage. Most life insurance providers do sell 30-year term life plans, which you can generally push the term into your 50s.

2. Do you require a life insurance policy with a cash value?

The cash benefit feature and the guaranteed investment return on it are two aspects that contribute to the expense of whole life insurance. Cash valuation policies are ideal for those who want to withdraw money or borrow against it in the future. 

Alternative Insurance Option: Guaranteed universal life insurance provides lifetime coverage at a lower cost when compared to whole life insurance because it does not build cash equity over the term of the policy. 

3. Do you want flexibility with your payments or flexibility with the benefit amount?

You usually pay a fixed price for the remainder of your life with whole life insurance. Whole life insurance guarantees the designated beneficiaries will receive a clearly defined death benefit. However, it’s likely that you’d like to pay less or your recipients don’t need the whole payout. 

Alternative Insurance Option: You can customize both the annual rate and the death payout in certain universal life insurance policies. When your finances change or your beneficiaries’ finances expand, this will offer some stability down the line.

4. Do you want the insurance payout to be distributed when you pass away? Or when both you and your partner pass away?

If your beneficiaries only require a life insurance payout once both you and your partner have passed away, whole life insurance is not entirely necessary. 

Alternative Insurance Option: 

Survivorship life insurance, also known as second-to-die life insurance, could be a safer option. These policies provide insurance coverage for two lives at the same time and only pay out if both policyholder’s pass away. Buying a Survivorship life insurance policy is usually less expensive than purchasing two different life insurance plans.

Whole life insurance policies may be appealing and applicable to some, but this type of insurance is not for everyone. The added benefits offered through whole life insurance can also be found by combining the sums of your investment and retirement accounts with a term life insurance policy. Before you buy any insurance package, make sure you are fully aware of the insurance options available to you. Also, be sure you understand the policy riders and other provisions each policy includes. 

Obtaining life insurance may be a hassle, but at the very least, the process is fairly quick to get started. After answering a few basic questions, you can get premium quotes from a number of insurers online. Even so, all insurance types have pros and cons, even whole life insurance. Therefore, it is critical to consider the choices and get updated with actual quotes on how much it will cost. In doing this, you can make an informed decision whether whole life insurance is right for the overall needs of you and your family.you