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The Pros and Cons of Whole Life Insurance

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This article was last updated Oct 09, 2017, but some terms and conditions may have changed or are no longer available. For the most accurate and up to date information please consult the terms and conditions found on the issuer website.

Whole Life insurance is one of the most popular types of life insurance, but many experts point out that it is not for everyone. For one thing, the premiums can be considerably more costly than those charged for other types of life insurance. Whole Life premium payments are, however, generally much easier to plan for and budget than are those of many other kinds of life insurance. That’s because most Whole Life policies are paid in fixed installments that will not fluctuate over time, whereas lots of other life insurance products are sold with variable rates that may go up, leaving policyholders with an unmanageable plan their budget won’t support. Whole Life also provides a chance for your cash value to grow, making it useful as a financial planning tool.

Paying Extra for Predictable Peace of Mind

The website of the New York State’s Department of Financial Services does a good job of summing up the pros and cons, as a way to educate and inform consumers. The agency points out, for example, that with Whole Life you’ll pay more than you do with Term Life insurance – which is purchased for a specific length of time and then expires unless you pay a higher premium to renew your policy. In exchange for paying more money for Whole Life coverage, you enjoy the security and peace of mind of knowing that you will be covered for your entire lifetime – as long as you continue to make your payments in a timely fashion.

Similarly, the beneficiaries of the policy – your heirs, survivors, or family members – have the promise of a payout that is a guaranteed amount, regardless of when you die. There are other kinds of life insurance that pay beneficiaries based only on the accumulated value of the policy. So in that case, for example, if you have not yet paid a considerable amount into the policy over a long period of time, then the payout may be relatively small compared to what you ultimately hoped to leave behind to those named as beneficiaries.

One Person’s Asset = Another Person’s Shortcoming

The appeal of predictable premium payments and a fixed dollar amount to be paid out to beneficiaries is what attracts people to purchase Whole Life instead of other kinds of life insurance. Interestingly enough, that steadfast, fixed-payment reassurance happens to also be the main reason that other consumers do not like Whole Life. As the saying goes, one person’s ceiling is another person’s floor – so what sounds great to one insurance buyer may sound way too restrictive to somebody else.

Let’s say someone buys a policy that provides a payout of a million bucks. Later, they launch a fabulous new business that catapults the value of their earning power to $10 million a year. What happens? All of a sudden that $1 million payout starts to look really inadequate because if they die, it will only compensate their beneficiaries about a month’s worth of what they normally earn. They would need to bump up their policy, but with Whole Life, they are stuck with it.

The same works in reverse, too, so that if you have coverage limits that seem excessive, some policies let you opt for lower limits. Doing that also reduces the cost of your premiums. So if you are going through financially challenging times that’s a great option to have – and one you won’t get with Whole Life. Perhaps your need for coverage diminished because your nest egg cushion grew or some of your named beneficiaries died. Those could also be reasons to lower your coverage and save some money, which would be problematic under a Whole Life policy.

The Chance for Your Money to Grow

Whole life also has a built-in savings component, too. A portion of your premium payments are invested by the insurance company and the insurer pays a guaranteed rate of return on that invested portion. The money grows tax deferred, and if you stop making your premium payments, you are entitled to receive the cash value of the policy or convert it into a paid-up policy with lower coverage. Those are details that depend on your policy and insurance company, so you have to check the fine print to determine exactly what your options are if you find you need to quit making payments.

Access to Your Money, but With Strings Attached

If you want to withdraw the cash value of your Whole Life policy, that’s also possible. You can’t take out the money any way you want, though, because there are stipulations attached. You essentially have two options. You can surrender the policy and stop making payments as explained before, or you can take out a loan against the collateral value of your policy.

That process of withdrawing money may take time, too, and we’re not just talking hours and days. Sometimes a policyholder has to wait two or three years before accessing their cash value. If you do borrow with a policy loan, you’ll also be charged interest as explained in your policy. Should you die before repaying that loan, the outstanding balance will be deducted from the payout to your named beneficiaries.

Since most life insurance products are a hybrid of Whole Life or Term Life (or some innovative variation thereof) the fundamental differences highlighted above will usually help you make up your mind.

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