How Does a Whole Life Policy Work?
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Differences Between Whole Life Insurance and Term Life Insurance
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Whole life insurance is a way for individuals to protect their families after their death. The individual decides on a coverage amount and agrees to pay monthly premiums to the insurance company. Paying these premiums makes sure that the death benefit will be paid and builds cash value in the policy. As the cash value increases, policyholders may borrow against it. Depending on the performance of the investments, the insurance company may elect to pay cash dividends to investors. Whole life insurance is a good investment option for people who need life insurance indefinitely to protect their family or company. Whole life can also be customized to add children or a spouse.
Advantages of Whole Life
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Whole life insurance holders are guaranteed a fixed premium for the life of their policy. While it may be initially more expensive than term life, whole life may be the more economical option in the long run since the premium does not increase if you plan to keep the policy for your entire life. As long as you keep up with your premiums, you are guaranteed to have the death benefit paid. The cash value grows tax free, and the death benefit is usually free from federal taxes.
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Face Value and Cash Value
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The face value of a whole life insurance policy is the amount of money that will be paid to the beneficiaries when the holder dies as long as premiums are current. The cash value of a policy increases over time as premiums are paid. The policyholder is able to borrow money against the cash value of the policy. If the holder of the policy ceases to pay the premiums for the policy, the holder will be paid the cash value but will not receive any further benefit when he dies. The holder also has the option to take out the cash value minus any premiums that are owed or outstanding loans on the cash value.
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