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What Is Whole Life Insurance (Explained: All You Need To Know)

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What Is Whole Life Insurance

Whole life insurance is a type of insurance policy where the insurance company provides life insurance coverage for the insured’s entire life in exchange for the payment of the policy premiums.

In other words, whole life insurance is a type of permanent life insurance where the policy does not have an expiration term.

According to the Insurance Information Institute, whole life insurance policies are the most common type of permanent life insurance that people tend to purchase.

The American Council of Life Insurers indicates that in 2019, 59% of U.S. individual life insurance policies issued were whole life insurance policies.

Whole Life Insurance Advantages

There are several reasons why many choose to purchase whole life insurance. 

Here are some of the main reasons why a whole life insurance plan is selected:

  • The policyholder’s premiums are fixed over time
  • You will have a savings component to your policy called the cash value 
  • You are guaranteed to receive your death benefits 

Those who are attracted by whole life insurance policies are individuals that want to ensure they provide financial security to their family should they pass away, want to have predictability in knowing how much premium they need to pay and how much life insurance coverage they get.

Whole Life Insurance Death Benefits

A person purchasing whole life insurance will have a certain coverage under the policy in the event of death called the “death benefit”.

Should the insured die, the insurance company is required to make the death benefit payout to the beneficiairies.

What’s interesting with whole life insurance is that you are guaranteed to receive the death benefits so long as you pay your premiums.

There are some types of policies called universal life insurance policies that may offer the policyholder the option to make changes to the death benefit or premiums over time.

In essence, by precisely knowing how much you will receive in death benefits, your family and beneficiaries will also have the comfort of knowing how much to expect should you pass away.

Whole Life Insurance Cash Value

One distinctive feature of whole life insurance policies is that they offer a savings component called the “cash value”.

The cash value is a type of “living benefit” where a portion of the premium you pay is saved in a savings component of your insurance plan.

During your lifetime, you can borrow against the cash value, it can serve as emergency funds if needed, or provide you with a source of saving.

It’s important that you read the terms and conditions of your permanent life insurance policy to understand how the cash value component of it works.

It may be possible that you can withdraw the funds or borrow against it but you should make sure that you understand the impact on your death benefit or its tax consequences.

Whole Life Insurance Cost

Insurance companies calculate the cost of whole life insurance policies based on a complicated method taking into account various factors in order to assess the risk taken under a policy.

In order to determine how much to charge in premiums, the insurance company will consider factors like:

  • Your age
  • Your overall health
  • Your lifestyle
  • Your gender
  • Your family medical history
  • Your height and weight
  • Smoking habits
  • Substance abuse 
  • Criminal history
  • Driving record
  • Dangerous hobbies 

And more…

In addition to that, you can also have other options or policy features that can affect your total cost, such as:

  • Choosing a shorter payment period of 10 or 20 years
  • Getting a guaranteed return rate 
  • Dividend crediting 

Once the amount of premium is established, then in most cases the policyholder will make payments based on a monthly, quarterly, semi-annually, or yearly to the insurance company.

Types of Permanent Life Insurance

A whole life insurance policy is a type of “permanent” life insurance plan covering the insured for his or her entire life.

There are different types of permanent insurance policies, such as:

  • Universal life 
  • Indexed universal life
  • Variable universal life 
  • Whole life 

What Does Whole Life Insurance Cover

A whole life insurance policy provides life insurance coverage during the insured’s lifetime.

Should the insured pass away, the insurance company is required to make the death benefit payout as set out in the policy.

The death benefit is an amount that is fixed under the policy.

To provide additional certainty of coverage, the policyholder can choose to purchase additional options (called riders) protecting the death benefit should the insured become disabled or terminally ill.

Typical riders are accidental death benefits and waiver of premium riders.

Whole life insurance is used for providing financial protection to the people you care about.

The money your beneficiaries receive can be used in different ways but mainly to pay expenses such as:

  • Debt
  • Student loans
  • College expenses
  • Living expenses 
  • Burial expenses
  • Caregiving expenses
  • Estate taxes
  • Medical expenses 
  • Mortgage 

The death benefit can also be used as a means of providing your heirs with an inheritance.

Every person’s reason for getting life insurance is unique and you should speak with your insurance agent or representative to assess your true needs.

Frequently Asked Questions

Let’s look at some frequently asked questions related to what is whole life insurance.

How Much Is Whole Life Insurance

Every person’s whole life insurance can potentially cost a different amount.

The reason for that is that insurance companies calculate whole life insurance premiums based on many factors and variables, such as:

  • Your age
  • Your gender
  • Where you live
  • Your coverage
  • Your lifestyle
  • Your overall health 
  • Your family’s medical condition 

To get the best whole life insurance and most affordable one, you’ll need to shop around, contact different insurance providers, or work with insurance brokers and agents.

By getting different whole life insurance quotes and possible coverages, you’ll be able to better define your true needs and decide what’s right for you.

How Much Whole Life Insurance Do I Need

The amount of life insurance that you need will depend on the personal objectives you intend to achieve.

If your objective is to provide your family with financial security when you pass away so they can pay for the bills and expenses, then you’ll need to assess how much coverage will help your family pay their expenses.

On the other hand, if your objective is to give your heirs an inheritance, you may decide on the amount of coverage based on how much you can afford in premiums.

Most people buying whole life insurance intend to provide their families with financial security after their passing and should as the following questions to decide on how much coverage they need:

  • How much does your family need to pay their bills?
  • How much income will they lose if you pass away?
  • How much do you need to cover your children’s tuition?
  • How much debt will they have to cover for you?
  • Do you have other assets and investments that your family can rely on?
  • Do you want to leave money for charitable organizations as well?

If your coverage satisfies you that your family will have enough to cover their bills, debt, and expenses without getting into financial hardship, then that may be the right amount of coverage you may need.

Who Should Purchase Whole Life Insurance

Anyone can potentially purchase a whole life insurance.

What’s important is to understand your financial situation so you can make an informed decision.

Are you buying whole life insurance to help your family cover your final expenses and estate tax, do you want to give your family extra financial security, do you want your family to have an inheritance?

In many cases, individuals who have young children or have families who depend on their income to survive will find that whole life insurance provides them with the financial security they need for their family.

Keep in mind that the younger you are and the healthier you are, the cheaper it is to get whole life insurance.

As such, it would be financially beneficial to consider your options earlier in life or when you are healthy.

When To Buy Whole Life Insurance

For individuals, you can buy whole life insurance pretty much at any time provided that you qualify with the insurance company.

The younger you are and healthier you are, the more you are guaranteed to qualify and the lower your premiums.

However, the older you are or if you have a certain type of illness, you may get disqualified from insurance providers who will not give you a quote.

The purchase of whole life insurance can also be considered in the following situations:

  • You intend to fund a trust to support your children after your passing
  • You want to pay for your estate taxes 
  • You intend to fund a buy-sell agreement as a business owner with partners 

How Do I Buy Whole Life Insurance

Buying whole life insurance is not that complicated in of itself.

You can either shop around by contacting different insurance companies, getting quotes, and making a decision or you can work with an insurance agent.

In many cases, individuals will work with insurance brokers and agents who can contact various insurance providers to get quotes.

To get a quote, you’ll need to share information about yourself such as your age, gender, occupation, health condition, and more.

Once you get a few quotes from different companies, read the terms and conditions of your policy, determine that your coverage is suitable, and see that the premium fits your budget, then you can formally purchase the plan.

It’s advisable to speak with an attorney or an insurance agent so they explain to you the specifics of your whole life insurance and provide you details of additional options (or riders) that may interest you.

What Are The Whole Life Insurance Riders

Whole life insurance riders are additional coverages that you can purchase when getting your whole life insurance plan.

Here are some of the common riders that you may see with a whole life insurance policy:

  • Spousal or family term insurance
  • Accidental death benefits
  • Waiver of premium
  • Accelerated death benefits 

There may be other types of riders offered by your insurance provider so it’s important to speak with them or your insurance broker to see what additional options you have.

What Is A Whole Life Insurance Policy Takeaways 

So there you have it folks!

What is whole life policy and how does it work in simple terms?

A whole life insurance is a type of insurance policy providing death benefit coverage for the life of the insured in exchange for the payment of fixed premiums over time.

What is interesting with whole life insurance is that it also has a savings component called the cash value where money can accumulate over time on a tax-deferred basis.

Unlike term insurance providing coverage for a fixed period of time, whole life provides life insurance coverage for the policyholder’s entire life.

The policyholder has a fixed premium to pay during his or her lifetime and is guaranteed to receive the death benefits under the policy.

In addition to that, you also get a savings component when getting a whole life policy that you can use as a source of savings, borrow against it, or withdraw during your lifetime.

Let’s look at a summary of our findings.

What Is Whole Life Insurance Summary

  • A whole life policy, as the name suggests, is a type of insurance policy that provides life insurance for the “whole life” of the insured as long as the insurance premiums are paid 
  • This type of policy has a cash value when a portion of your premium payments are invested into the cash value that can possibly grow over time on a tax-deferred basis 
  • During your lifetime, you may borrow against the cash value or make withdrawals, use it to pay your premiums, or surrender it to fund your retirement 
  • The key feature of whole life insurance is that the premiums are fixed for life, the death benefit is guaranteed, and the cash value grows over time 
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