How Whole Life Insurance Works

How Whole Life Insurance Works

The general concept of life insurance is simple. You and an insurance company enter a contract where the insurer, in exchange for a premium, guarantees a specified payment to your beneficiaries in the event you pass away while the life insurance contract is in place.

 

Whole life insurance policies are contracts providing a fixed amount of benefit for your entire life. So long as you pay your premiums, your beneficiaries will receive the death benefit purchased whether you live another 10 years or well past the age of 100. This differs from the more know term life insurance policy which only provides coverage for a limited time, such as 10 or 20 years.

 

Like term life insurance, whole life insurance premiums are fixed and are used to pay for insurance and administrative costs. But a whole life insurance premium has a third element – tax deferred savings. This third component is used to build up cash value within the policy.

 

The cash value serves a valuable purpose. When you are young, the cost of insurance is extremely low. However, as we age, the cost of insurance increases exponentially. To keep whole life insurance premiums level for an entire lifetime, the cash value saved over time will be used to offset the high insurance cost later in life. In effect, the additional premium paid for a whole life insurance policy, in comparison to term life insurance, is used to pre-pay the higher cost of insuring us as we get older.

 

Whole life insurance is a form of permanent insurance and often confused with a similar, but markedly different product. Universal life insurance is also a form of permanent life insurance but is usually offered with lower premiums. While universal life has its own benefits, it is important to note whole life is the only form of life insurance that:

 

• Is designed to build cash value.
• You can borrow against the cash value.
• Will be fully paid up at a pre-determined and fixed age.
• Guaranteed not to lapse if you make your premium payments.
• The policy’s interest payments can be added to the death benefit.

 

Whole life insurance has many benefits over its term and universal life cousins. But this product isn’t for everyone. To learn more about whether a whole life insurance policy might be right for your financial needs, contact my office today.