Whole Life

The life insurer divides your whole life premiums into three portions:

• One part covers the cost of insurance
• One part takes care of the administrative fees
• One part funds the cash-value account

The insurer invests the money in the cash-value account into a conservative-yield form of investment. Since whole-life policies promise a guaranteed minimum return, you are protected against several market fluctuations and provide better financial security. But when the insurer’s investments perform well, you earn a better return.  

Generally, the cash value grows at a slow pace in the first few years and then picks up the pace later. As you grow older, the cash value growth rate slows down again as a greater chunk of your premium payments is used to cover the cost of insurance.

Your life insurance policy’s face amount (that is, the death benefit) is for your loved ones while the cash value is available to you while you are still alive. If you do not use all of it, the insurer claims the remaining cash value. When you die, your loved ones receive only the death benefit, not the unused cash value.

So, how can you tap into your policy’s cash value? You can access it in many ways, such as:

• to increase the death benefit
• to take out a loan
• to make a withdrawal
• to pay life insurance premiums

However, lifelong coverage and a built-in investment account — the two main features of whole life insurance — come at a price. If you want a whole life policy, expect to pay six to 10 times more than a comparable term life plan. All the same, whole life insurance can be a good option for some people, despite the high cost.

The better choice between whole life and universal life insurance is specific to each person. That is why speaking with a professional can help decide between a whole life or universal life plan.

Who should consider Whole Life Insurance?

You may want to consider it if you:

• Have a lifelong dependent/beneficiary– Parents of a child with special needs or someone else with a lifelong dependent may find whole life insurance a better option. That is because it pays out the death benefit to your beneficiaries regardless of when you die, as long as the life insurance policy is active.  
• Want an additional investment vehicle – Affluent people who have already maxed out traditional investment vehicles may find the cash-value component to their liking. It gives a better return than a bank savings account, though the interest rate is not as high as most traditional investment options.
• Wish to leave an inheritance – If you want to leave money for your loved ones or a charity, a whole life plan could make sense for you.
• Want to preserve your estate (estate planning) – Certain costs, like probate fees and taxes, can chip away at the inheritance you want to leave your family. Putting a whole life insurance plan in place can ensure your loved ones inherit all the money you intended them to receive after your death.

• Whole Life Insurance Pros and Cons:

  Just like any other financial product, whole life insurance comes with its own set of advantages and disadvantages.

  Pros	Cons
  Coverage lasts your entire life	Costs significantly more than term life insurance
  Policy builds cash value that you can tap into during your lifetime	Rate of interest is lower than what traditional investment vehicles offer
  Guaranteed minimum rate of return on the cash value	High administrative fees
  A guaranteed death benefit

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