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Should You Buy Whole Life Insurance?

Whole life insurance is permanent life insurance, guaranteeing a death benefit throughout the insured’s lifetime. This coverage differs from term life insurance, which guarantees a death benefit for a limited time, such as 10, 20, or 30 years. A whole life insurance policy will not lapse or expire if the premiums are paid according to the policy’s stipulations.

Key takeaways:

In addition to lifetime protection, whole life insurance can offer long-term financial value for retirement or estate planning. It comes at a higher cost than term life insurance, which might diminish its potential value for some people. Learn about the benefits and drawbacks of including whole life insurance in your financial strategy.

Should I buy whole life insurance?

Buying whole life insurance depends on your financial situation, needs, and goals. It is significantly more expensive than term life insurance. Fees can decrease the cash value and jeopardize your policy. However, this coverage might benefit people who want and can afford guaranteed lifetime coverage.

Paying premiums

Some whole-life policies can be paid with a single premium payment or premiums payable up to a limited number of years. Many insurers allow breaking up annual premiums into quarterly or monthly payment plans. Payments may also be spread over the time it would take for the insured person to reach a certain age.

The premium payment goes toward:

  • The death benefit
  • The insurer's administrative fees and charges
  • The policy's cash value

The portion that goes into your cash value account grows by a fixed amount and/or on gains from policy investments. If you accumulate enough money, you might be able to use it to cover premium payments. This could help you keep the policy in force if you have problems making the payments.

The cash value would also be the basis for the amount paid to you if you surrender your policy.

Guaranteed insurability option

A whole-life policy might allow you to buy additional coverage periodically without proving your insurability again. This option is generally not available with term policies. A guaranteed insurability (GI) rider can help you ensure continued protection if you want to increase your death benefit or if your health declines.

Who should buy whole life insurance?

Whole life insurance could be a helpful tool for many financial situations. People who want protection for the insured’s lifetime with no increase in premiums may feel secure with this option. It can also be part of a long-range plan for building and spending wealth.

Those looking to supplement their finances with savings might also want to build cash value in a policy. If you need less coverage later in life, you can take out loans or withdrawals without canceling the policy.

Purchasing whole life insurance can make sense in these scenarios:

  • Wealthy individuals who want to help heirs pay estate taxes.
  • Those who have maxed out their 401(k)s or similar investments.
  • Parents of lifelong dependents, such as children with special needs.
  • People who can comfortably manage paying the higher premiums.
  • Individuals who prefer securing lifetime coverage over buying temporary term insurance protection.
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Is whole life insurance a good investment?

Whole life insurance might be an effective investment strategy for some, but it is not a short-term vehicle. It may take several years, even decades, for your policy to reach a minimum cash buildup before you can loan or withdraw funds.

Depending on the insurer’s financial performance, you may receive dividends on your policy. Dividends are not guaranteed but might be paid in cash or allowed to accumulate at a predetermined interest rate.

Other types of permanent life insurance offer the potential for cash value, so it’s helpful to consider their unique characteristics:

Limited pay whole life

This insurance provides a lifetime of coverage for level premiums. Per customer preference, payments last 10, 15, or 20 years.

Single premium whole life

This type of policy offers immediate income protection for one premium and no additional payments.

Guaranteed issue life

As the name suggests, applicants cannot be turned down. This insurance does not ask health questions or require a medical exam. However, the coverage amount and potential cash value are often enough to cover final expenses. Beneficiaries won’t receive the full death benefit if the insured person dies within two or three years of purchasing the policy unless the death results from an accident.

How does whole life insurance work as an investment?

When you pay your premium, your insurer sets aside a portion to grow at a guaranteed fixed rate. The growth is not dependent on market performance. The funds are tax-deferred as long as you keep them in the policy.

Once your policy has accumulated enough cash value, you can start taking out loans against it. You aren’t obligated to repay, but your insurer will subtract outstanding loans from your beneficiary’s proceeds when you die.

You typically won’t have to pay taxes on loans, withdrawals, or surrenders as long as the cash value is less than the total amount of premiums paid.

When you should not choose whole life insurance as an investment

Although cash value growth in whole life insurance can be more predictable than other investment options, there are several reasons not to choose it as an investment:

  • Cash value is a "living benefit" your beneficiaries will not receive when you pass away. They will only receive the policy’s face value minus loans and withdrawals.
  • If you have a short investment time window, whole life insurance is probably unsuitable. It often takes years of paying premiums to save enough cash value to borrow against or withdraw.
  • Whole life insurance will likely not meet your expectations if you want to maximize returns. As an investment, whole life policies tend to underperform stocks, mutual funds, and other types of investments.

Other types of life insurance

Life insurance policies come in two main categories: term and permanent. Term life insurance does not have a cash-building component; you only pay for coverage that ends after a set period, such as 15 or 30 years. You can purchase other types of permanent insurance, such as:

Universal life insurance (ULI)

Universal life insurance offers more flexibility with premium payments and the potential for higher returns. The cash value correlates with interest rates, which often fluctuate.

Indexed universal life insurance (IUL)

IUL ties cash value growth to the performance of indexes such as the S&P 500. Premiums and death benefits are adjustable within certain limits, while whole life premiums and benefits are fixed.

Variable universal life insurance (VUL)

VUL ties cash value growth to subaccounts containing your choice of investments, typically mutual funds and bonds. Premiums and death benefits are adjustable within set limits. Your cash value could decrease based on how your chosen investments perform.

Whole life insurance may be part of an overall financial planning strategy, but it can be expensive. A financial planner can help you decide if it is a desirable choice.

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