What Is Whole Life Insurance?
Whole life insurance , also known as ordinary life, straight life or traditional whole life, is a type of permanent insurance that guarantees your death benefit for the rest of your life while providing cash value that you can access for any reason. As you pay your premiums, your money accumulates in an account and grows with interest and often with dividends paid directly by the insurance company. With whole life insurance, your premium is guaranteed to remain the same for as long as you live, even if the insurance company's costs rise. When you reach old age, your premium will not increase over the amount you paid when you started the policy.
How a whole life insurance policy works?
The insurance company calculates level premiums sufficient to pay the cost of your insurance coverage (mortality costs) to the end of your life. In the policy's early years, the premiums are higher than the mortality costs. The difference between the mortality costs and the premiums is placed into a cash reserve account known as the "cash value". In later years, as mortality costs rise due to your advancing age, your premiums are lower than the mortality costs, and your whole life insurance policy draws on the cash value to help pay the insurance costs. If you continue to keep up your premium payments, your cash value will eventually grow to an amount equal to your policy's death benefit. But if you die at any time before you reach the maturity date, your beneficiary receives the full death benefit, no matter what your cash value is at the time of your death.
Accessing your money (cash value) in the policy
Your cash value can be used at any time as long as there is some money in the policy. Whole life insurance accumulates cash value as savings. Part of each premium payment accumulates in this account and continues to grow tax- deferred as long as the policy is in force. By borrowing against this cash value, you can avoid paying taxes on the gains. This loophole makes whole life insurance an excellent savings vehicle for education, retirement or other personal goals, all while maintaining death benefit coverage for your loved ones. Otherwise you can access the cash value in your whole life insurance policy through a complete or partial surrender (cancellation) of your policy. You can access up to your cost basis without any income tax consequences. However, surrender will terminate all or part of your coverage and may have tax consequences if you have had any gains in your policy.
Policy dividends
Another benefit of whole life insurance is payment of dividends. In order for a policy to pay dividends, it must be a participating policy. Nonparticipating policies pay no dividends. Dividends are not guaranteed, but are paid at the discretion of the insurance company's board of directors, depending on a company's expenses, the performance of its investments, and the amount of death benefit payouts made that year. The amount you receive is determined by a formula that takes into account the policy series, the size of your policy, your age, and the number of years the policy has been in force. Policy dividends are free from income tax, because they're considered a return of premiums you have paid and can be taken in cash, used to pay some or all of the policy premium, reinvested to gain (taxable) interest, or used to buy paid-up insurance additions to the policy (for which no further premiums are required). You may surrender accumulated paid-up additions in later policy years and use the proceeds to pay the regular policy premiums.
Other advantages of cash value in whole life insurance
The cash value build-up is creditor-proof in most states, which makes whole life insurance a sort of double indemnity policy by protecting your family should you die suddenly, as well as protecting your family should you be sued or have to declare bankruptcy. If you ever feel that you are unable to continue making premium payments, or that you have more coverage than you need, but you don't want to surrender or take a loan against the policy, you have a number of alternatives. Based on the size of your cash value account, you can use your cash value to purchase what is known as reduced paid-up insurance, whereby your coverage amount is lowered and no further premiums are required. Or you could turn the cash value into extended term insurance , which would provide the same level of death benefit you now have, but for a limited period of time.
Buying whole life insurance online
Traditionally, most people bought life insurance through an agent that would come to their houses and present them with options for whole life insurance. More often than not, the agent was working for only one company, sometimes using scare tactics and high-pressure salesmanship to guilt-trip a customer into buying a policy. With the rise of the Internet, consumers are now free to research different types of policies from different companies in an unbiased manner. The internet has long offered term life quote comparisons available instantly without any expert consultation. However, whole life insurance is more complicated because it is permanent and includes a personal savings element. Finding the best whole life insurance online requires comparing companies and policies without bias, as well as highly knowledgeable life insurance professionals. BeamaLife.com, an industry-recognized website for the best whole life insurance online, provides free whole life insurance quotes .
