Permanent Whole Life Insurance Definition
One of the first decisions anyone in the market for life insurance must make is whether to choose term or permanent whole life. While term life insurance is cheaper, permanent whole life offers additional benefits. You must understand what those benefits are and then decide whether permanent whole life insurance is worth the extra cost.
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Defininition
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Permanent whole life insurance policies combine a death benefit and a savings account. This is in contrast to term life insurance policies, which do not include a savings element. With a permanent whole life insurance policy, the premiums are higher than they would be for a term life insurance policy offering the same death benefit. This is because part of the premium pays for the death benefit while the other part is invested.
Benefits
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Permanent whole life insurance policies offer many benefits. First, they force you to save because money is taken out of your premium. Second, these policies do not expire. As long as you pay your premium, the policy remains in effect. Second, the premium stays the same throughout the life of the policy. Third, the portion of the premium that is invested grows on a tax-deferred basis and the death benefit itself is tax-free, making these policies a good estate-planning tool.
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Drawbacks
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Permanent whole life insurance policies also have drawbacks. First, the premiums are expensive. It takes about 12 to 15 years before the cash value of your policy equals the premiums you have paid. Second, you cannot choose how to invest your premium dollars. The insurance company chooses where to put the money. Third, insurance companies tend to have high fees and administrative costs, which suck away part of your savings.
Cash Value
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Permanent whole life policies accumulate cash value. This is the amount of money available to the policy holder, and is not the same thing as the death benefit. Once you accumulate sufficient cash value, you can use it to pay your premiums, borrow against it or surrender your policy early and take the cash value.
Other Permanent Policies
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In addition to permanent whole life insurance, other types of whole life insurance are also available. These include universal life, in which savings earn interest at money market rates, and variable life, in which the savings are invested in stocks, bonds and mutual funds.
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References
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