Whole life insurance is a kind of permanent insurance. It gives you life-long coverage for a fixed
premium based on your age when you buy the policy. The risk of your death increases with age. Yet
insurance companies keep the premium and face amount of the policy the same. They can do this by
charging more in the early years of your policy than for term insurance and less in later policy years
than for term insurance.
A whole life insurance policy has a cash value. This cash value is the amount of extra premium you
have paid, plus interest that the company pays to your account. You can borrow from the cash value of
your insurance policy. However, if you die before you repay this loan, the benefits are less. The loan
plus interest is subtracted from the face value of the policy.
If you skip paying a premium, the cash value can be used to keep the policy active if you tell the
company to do so. Cash value can also be used to buy a paid-up whole life insurance policy in a
reduced amount if you want to quit paying premiums. Or you can convert the policy to term insurance.
If you cancel the insurance, you can use the cash value to buy an annuity. An annuity will give you a
certain monthly income for life or a fixed period. (The monthly payment you receive will depend on the
amount of cash value and your age.) You can also give up the policy and get the built up cash value in
one payment.
One kind of whole life insurance has a limited payment policy. Instead of paying premiums for the rest
of your life, you pay for a set number of years - usually 10 or 20 years - or until you reach a certain age,
such as 65. When you pay premiums for a shorter time period, your premiums cost more. Before
buying any life insurance, decide which is the best buy for you.
Advantages of whole life include the tax-deferred interest you earn on your cash value (which becomes
tax-free if you never take the cash value out of the policy). Loans on the cash value of the whole life are
generally less than that charged for loans available elsewhere.
Regular premium payments must be made on whole life or the policy will lapse. Outstanding loans
when you die will be subtracted from the amount paid to your beneficiaries. The interest rate credited to
the cash value of the policy is usually far below what your funds could earn elsewhere. Cash value
grows relatively slowly during the early years of the policy. This means that if you cash in a whole life
policy after only five years, you get relatively little back for the relatively higher premiums you've paid.
Whole life is best if you have no self-discipline or tolerance for risk when you save or invest.
it should not be used as a substitute for legal advice. Call if you have questions.