Life insurance plays a number of roles in financial planning, report advisers at LifeInsure.com. In addition to providing income to a family following death, people use whole life insurance policies as a piece of a complete investment portfolio. While term life insurance is designed to expire after a period of time and provides a lump sum to beneficiaries when the policy is in force, whole life insurance is permanent and expected to remain in force for a lifetime.
Features
Whole life provides a guaranteed death benefit. It also has a cash component to the policy. Interest grows as long as the policy is in force and is tax-deferred. Beneficiaries also do not pay taxes on the payout from a whole life insurance policy or on its interest. The policy can be cashed in at any time for the amount invested. Taxes then are due on any interest earned. Policyholders also can take loans from the whole life accounts.
Types
There are a number of different types of whole life insurance policies. Policyholders are owners of mutual life insurance companies, which pay annual dividends to policyholders. Dividends can be applied to the policy to enhance the cash value, pay future premiums or be paid directly to consumers. Two people, typically a married couple, can own a survivorship whole life insurance policy that pays out to beneficiaries after both parties have died. Modified whole life policies start out with lower premiums for the first five years and increase periodically.
Benefits
Whole life insurance does not increase in price as the insured ages. This is especially important for those who purchase whole life insurance at a very young age when premiums are the lowest. Another benefit is that there are little or no eligibility requirements for taking a loan from a whole life insurance policy.
Potential
A policyholder can add riders to a whole life policy to enhance its effectiveness. Riders can be added that pay higher benefits for accidental death and waiver of premium riders provide protection to policyholders who become disabled, at which time the premiums will be waived. A living rider can provide a way for policyholders to begin receiving payments from the insurance in the event he becomes terminally ill and needs money for treatment.
Warning
Premiums for whole life insurance are much higher than those for term insurance. The death benefit is reduced when a loan is taken from the policy. Interest must be paid to the insurance company when policyholders take some of their own money out of the account.
Member Comments