Is a Whole Life Insurance Policy Good?
Whole life insurance is bought by people who want to leave a financial benefit to their loved ones in case they were to die prematurely. Along with insurance, this policy provides a savings vehicle that has special tax advantages.
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What is Whole Life Insurance
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Referred to as the traditional policy, whole life insurance is one of two types of permanent policies, with universal life being the other. Both provide coverage of the insured until their death as long as the premiums are paid in a timely manner.
Cash Value Account
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Whole life insurance has a savings component called a cash value account. This is funded by the remaining portion of the premiums after the costs of insurance are paid for. The insurance company invests those funds into the market. A return rate is guaranteed by the insurer and the money is credited to the account. However the performance of the investment can increase the amount the insurer deposits into the account.
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Benefits
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Whole life insurance will provide policy owners with premiums and a death benefit amount that will never change throughout the life of the policy along with a consistence payment schedule. Also the funds in the cash value account are tax deferred, meaning that it will grow tax-free until it is withdrawn. A policy owner can also borrow against the policy and the funds received will also be tax-free.
Who Buys Whole Life Insurance
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Policyholders include individuals who have responsibilities, such as a family or financial obligations that include mortgages or other outstanding loans. People may also purchase this policy to use the tax advantages from the cash value account to grow their money faster. Policy owners have access to their account at anytime and can use the money for any reason such as emergencies, vacation, college tuition or to even fund their retirement.
Compared to Universal Life Insurance and Term Life Insurance
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While whole life provides stable payments and values, universal life gives policy owners flexibility in those two areas. This policy has two options: Option A and B. The first option uses the cash-value account to provide a level death benefit. The more money in the cash value account, the less the insurance company will have to pay out, which lowers the premiums for the policy owner. Option B pays strictly for the death benefit and once the insured passes away, the beneficiary gets that plus the funds in the account, which will increase the total benefit amount. This is more expensive than option A. Premiums can be paid using the cash value account, thereby affording the owner to skip payments without risking a lapse.
Term life insurance is a policy that does not feature a cash value account or investment options. The premiums would pay only for insurance, which makes this insurance policy a cheaper option. An applicant would agree to buy insurance for a specific number of years such as 5, 10 or 20 years. Once the "term" expires, the policy will be canceled. However the policy owner can renew the policy for additional years or convert it into a permanent life plan.
Warning
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Whole life insurance is the most expensive life plan. When paying for this policy, there is no flexibility on the agreed payment schedule. The policy owner will have to use reserves from the cash value account or risk surrendering their policy.
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