What is whole life insurance and how does it work?
Life insurance comes in different types and whole life insurance is one of its categories. This is the kind of insurance that gives you coverage for an entire lifetime. It not only helps your beneficiaries get death benefits when you die but also allows you to accumulate cash value. You can use the amount as savings or even borrow some of it to use when you are still alive.
The insurance policy of this type of insurance applies the premiums that you pay both to your savings and the death benefit. Though you may pay more to get this type of insurance compared to others, you can gain lots of benefits. The insurance policy pays you dividends that are tax-free giving you some flexibility compared to other types of insurance like term life insurance. You can use this dividend to pay premiums or acquire cash pay-outs.
Whole life insurance comes in three options namely the traditional form, single premium, and interest-sensitive form. The traditional form provides you with a minimum return rate on the portion of your cash value. Like an adjustable rate mortgage, the interest-sensitive option offers a variable rate on the portion of your cash value. This form gives you flexibility since you can raise your death benefit without interfering with the premiums. A person with a lot of money can go for the single premium option.
Life insurance policies are charged from analysing risks. An expensive policy usually has a higher risk than a cheap one. Since whole life insurance covers you for a lifetime, the risk of dying is high making it expensive. A term life insurance has minimal risk since it covers you for a specific period in which you may not pass away.
As you pay premiums for whole life insurance, the policy aims at financing your death benefit over a long time. Unlike other types of insurance, the premiums of whole life insurance do not change with time. It is beneficial in that some of the premium money that you pay is forwarded to your cash value. By purchasing whole life insurance early, you can use the portion of your savings to pay your insurance policy.
The insurance also provides lifelong coverage eliminating the need to take any future medical exams. You also save on taxes to your estate. Though the policy has many benefits, it has a low rate of return. You should therefore not use it solely as your main tool for investment.
Whole life policies come with different prices at various companies. If you an agent offers minimal options from a single company, check out online life insurance quotes from other companies. Do not work with the first company you come across without comparing rates from other institutions. A broker can provide different quotes that come with numerous options.
You may also need the services of a financial advisor to review your financial plan. Since whole life insurance is more expensive than term insurance, you need to ensure that you are working with a stable company to maximize profits.