Buying life insurance is a good way to make sure your family will be taken care of if anything were to happen that resulted in your death. There are many types of life insurance policies that you can purchase to help pay for your funeral expenses and that will allow you to leave money to your beneficiaries. In addition, some life insurance plans, such as whole life insurance, can be used as an investment tool to help you save money.
What Is Whole Life Insurance?
A whole life insurance policy is a type of insurance designed to protect the buyer over the course of their entire life. Along with providing a cash benefit to the holder's beneficiaries upon their death, a whole life insurance policy can also be used to help the holder accumulate wealth. As the insurance premiums are paid, the policy accumulates a cash value that the policyholder can withdraw when needed or he or she can borrow against it.
Types of Whole Life Policies
Whole life insurance policies come in three basic types:
- Variable Life; and
- Variable Universal.
Universal Life Insurance
This is the most basic type of whole life insurance with a part of the premium you pay going toward the death benefit and part of it going to the cash value of the policy.
Variable Life Insurance
This type of whole life insurance policy is more of an investment than it is insurance. With this type of policy, most of the premium goes toward the insurance company's fund, where it is invested in various types of mutual funds, stocks or other investment tools. This is a riskier type of whole life insurance policy because the death benefit can be affected by the investment returns. The policyholder can opt to pay a higher premium in order to have a guaranteed death benefit amount.
Variable Universal Insurance
A variable universal insurance policy is a combination of universal and variable life insurance policies. While this policy may offer a guaranteed death benefit amount, the money not going to the death benefit can be invested by the buyer in the investment instruments offered by the insurance company. It offers more flexibility than a regular universal life policy, but it is safer than a typical variable life insurance policy.
Variations of Whole Life Policies
Along with the three basic types of whole life insurance policies, there are other variations on whole life policies as well.
Joint and Survivor Whole Life Insurance
This variation of a whole life insurance policy covers more than one person and is most often purchased by married couples. With this type of policy, the death benefit is not paid out until both of the policyholders have passed away. The premiums for this type of policy are usually lower because it has more potential for having a longer time period before the benefit will be paid out. This policy can be used as a tool to help pay estate taxes because the estate taxes can be delayed until both policyholders die.
Family Income Life Insurance
This policy is a combination of a decreasing term life policy and a whole life insurance policy in that the term policy provides a monthly payment from the deceased policyholder's plan to the beneficiary at some point in the future.
Modified Whole Life Insurance
During the first five years with this type of policy, the premium is offered for a lesser amount than that of a regular whole life insurance policy. After the five years have passed, the premium will increase to a specified amount for the reminder of the policy. This policy will not decrease in value and is never revoked, unless the policyholder stops paying the premium. This can be a good policy for a young person starting out on their own and wanting to have life insurance.
Graded Benefit Whole Life Insurance
This type of policy is usually bought by someone who has trouble getting covered for life insurance. Most policyholders are at greater risk of passing away within five to 10 years of buying the policy. As such, the premiums on this type of policy are usually higher, and the death benefit is limited during the first few years.
Most of these policies reach the face value limit for the death benefit within three to seven years and only when the policy has "matured" will the death benefit equal the face value of the policy. The cash value of these policies are limited as well, and they will usually not equal the matured face value of the death benefit until the policyholder reaches 100 years of age.
Advantages of a Whole Life Policy
There are several advantages to buying a whole life insurance policy for both the policyholder and their beneficiaries. For the policyholder, a whole life insurance policy allows them to accumulate money for the future and, if needed, they can borrow against that cash value. When paying back the money the policyholder borrowed, they must pay interest on the loan, but the cash value will continue to grow.
A benefit to beneficiaries is that with a whole life policy, the benefit is not part of the probate estate, unless the estate itself is named as a beneficiary. This means that the beneficiary can receive the proceeds without the delay or expense that can be caused by the administration of the estate. Also, the death benefit is generally not subject to federal taxes and there is no public record showing the amount of the death benefit and to whom it was paid.
Many people use their whole life insurance to save for their retirement because the cash interest or earnings can be accumulated tax-free or tax-deferred depending on whether they are distributed at the time of death to the beneficiaries or to the policyholder upon retirement. In addition, the cash value isn't subject to the same market risks as other long-term investments. A whole life insurance policy can be a good choice for someone wanting to secure their or their family's future.