At first glance, insurance seems like a straightforward and simple concept that is easy to understand. But permanent life insurance policies and determining which life insurance is best, term or whole, contain investment components that can cause much confusion.
For a whole life insurance policy, some of the money you pay as premiums accumulate cash value. This takes the form of a tax-sheltered investment account, which the policyholder may borrow against or withdraw from. This is a clever way of hitting two birds with one stone—insuring a specific contingency while at the same time providing a legacy for your heirs through said investment tool.
Having an investment component, whole life insurance provides policyholders the ability to accumulate wealth while paying for the premiums that cover the insurance cost. These premium payments also contribute to equity growth in a specific savings account.
Moreover, as indicated by its name, this type of insurance is intended to protect an individual for his or her entire life.
The use of whole life insurance depends on the specific needs and requirements of an individual. In fact, it is a well-settled principle that different insurance policies fit different people.
If you want to provide dependent family members with sufficient funding upon your death, then whole life insurance would be proper. It is also used by individuals if there is a need to liquidate business debts and mortgages, as well as to leave heirs money to settle outstanding obligations.
A whole life insurance policy also provides quick cash and much-needed liquidity to heirs and surviving family members that are dependent on you for support and sustenance.
Benefits of Whole Life Insurance
Part of its intention to pay out a lump sum to you loved ones when you die, a whole life insurance policy sounds a greatly beneficial insurance policy. But only a small minority of people take out whole life insurance policies as opposed to the vast number of individuals who purchase term insurance instead.
The difference between whole insurance and term insurance is that the latter runs for a specified period. With term insurance, the insured will have to set the term of the policy, with a term depending on the quotation received from the insurer.
If you pass away within the term, a tax-free cash lump sum payment will be made in favor of your heirs and surviving family members. However, should you die beyond that specified term, the term insurance plan loses its cash-in value.
On the other hand, whole life insurance is designed to last as long as you do. Your death need not take place in a specified term and should it take place, your loved ones will be entitled to receive a lump sum amount. Simply put, whole life insurance does not expire or go down in value.
Another benefit of a whole life insurance is its permanence. Once the insurance has been issued, it can no longer be revoked, reduced or canceled except only in cases of non-payment or fraud.
This particular feature provides whole life insurance a certain degree of certainty which is attractive to the policyholder.
Which Life Insurance Is Best—Term or Whole?
The answer to which life insurance is best, term or whole, depends on a number of factors. As already mentioned above, the cost for whole life insurance can be six or eight times more than term life insurance, which could affect decisions of insurance buyers, especially with those having intense bottom-line concerns.
While cost is crucial in making important decisions such as buying insurance policies, it should not be a sole concern in an all-or-nothing scenario. You should strike a balance between the needed security and benefits as compared to the total premium payments needed.
In fact, some personal budget issues have resulted in many discontinuing their life insurance policies or allowing them to lapse or expire. However, one should bear in mind that the benefits of whole life insurance are only benefits as long as you keep the policy.
When the circumstances are right, the benefits of whole life insurance outweigh the cost incurred.
Another beneficial feature of whole life insurance is its cash value, which the insured can borrow from while still alive. This cash value accumulates at a tax advantage, as your money withdrawn is not being taxed as long as the total withdrawal does not exceed the paid-up amount.
Another tax advantage is the payment of dividends to the insured with regard to the insurance component of said insurance policy. Normally, dividends are taxable against the shareholders as their gain from their stock investments. But the IRS treats the dividends being paid out to the insured as return of premium instead of gain. Hence, these dividends are not taxable.