For this post, I want to quickly cover whole life insurance. What it is, when it makes sense, and how to customize it to your needs.
In our last post, we explored the five common myths of whole life insurance. In doing so, we revealed that the mainstream voices are pushing a false narrative that has become accepted by many as fact.
However, in this post, I want to discuss the basics of whole life insurance.
What is Life Insurance?
Life insurance is a form of insurance that pays out a sum of money upon the death of the insured.
Sounds morbid, right?
Well, consider the loss of income, funeral expenses, and potential debt left behind that comes with the loss of a loved one. Life insurance helps alleviate this pain that can have a pretty devastating financial impact on families.
There are effectively two options with life insurance:
- Permanent Coverage
As of 2019, 71% of consumers who owned life insurance owned a term policy and 44% owned a permanent policy, which means 15% of consumers owned both.(source)
How it Works
Whole life insurance is a form of permanent life insurance and works differently than term life insurance in that it never expires, it lasts for your whole life.
This coverage is far more expensive because it is guaranteed to last your entire life at a level premium and guaranteed to pay out a death benefit to your loved ones if you maintain that premium.
On average, whole life insurance is 5-15 times more expensive than getting a term policy that is starting with the exact same amount of death benefit.
Every time you pay into your whole life policy you are actually purchasing more and more of that death benefit, as in you own it, it's yours.
When, or if, you stop paying you could either still have a portion of the total death benefit guaranteed for the rest of your life or be refunded some of your premiums.
When To Consider Whole Life
People who can afford to, may elect to get whole life insurance so that they don’t feel like they are at risk of paying into term coverage without any benefit in return.
Other people may get it for some of the other benefits that we discuss regularly on this channel such as the safety and government favored treatment towards the savings portion that comes with your policy, called cash value.
There are several different ways to structure a whole life policy, making it potentially much more confusing than term life insurance. You can design it to make the cash value (which is accessible tax-free) grow way faster, for example.
That's a bit beyond the scope of this brief overview, but something I discuss regularly in the content I provide.
Whole life insurance comes in many forms, but all of these permanent policies have a cash value that is tied to the policy.
This savings portion is required by state law for the insurance company to maintain as reserves, but the insurance companies will allow you to utilize these funds while you are living.
As your cash value grows, oftentimes so will your death benefit. Meaning that your death benefit can increase as you age.
I just wrapped up with a gentleman who is 38 and his whole life insurance death benefit is starting out is 2.2 million and by the time he reaches age 78, the average age for a male to die, he is guaranteed to have a 5.9 million dollar death benefit for his family.
The whole life insurance death benefit is well suited for those who want to leave a legacy for their loved ones regardless of what age they pass.
If you want to ensure that your spouse and children, or even a charity are guaranteed a million dollars, there’s no better way to do that than to budget it for it monthly, by getting a whole life insurance policy.
This allows you to spend the money you have built up in your retirement accounts without second thought of whether there's going to be enough left over to accomplish your legacy goals after you die.
For those who think that they will need a death benefit beyond just the timeframe that a term policy lasts, whole life insurance is a great option for being able to
- Guarantee future insurability
- Maintain a level premium
- Not have to worry about costs increasing drastically in the future when you are more likely to die (when insurance companies will charge considerably more for the same amount of coverage).
One of the most common reasons for a person to get term insurance instead of whole life (outside of affordability) is because of the opportunity cost they see with the extra money that they could be investing elsewhere if they had lower premiums for that period of time.
This is a very wise consideration, however having a desire to add whole life insurance as a part of a financial plan goes beyond just the death benefit for many of our clients.
With the right companies, whole life insurance policies can have very favorable growth and terms to their savings portion, some guaranteeing returns in the savings portion at 4% with dividends added on top.
This makes it a very unique place to park a portion of your money to not only diversify away from the market and gain guarantees, but it also is one of the only places where your money can grow tax-free if accessed properly and paid out tax free upon death.
If considering a whole life insurance policy, make sure to carefully consider the guaranteed versus non-guaranteed cash values on illustrations. Also, consider the actual historical performance with the different types of permanent coverages as it will often not only impact your cash value, but also your death benefit performance.
There is also a substantial difference in policy performance just based on how the policy has been structured.
Next week I will be covering the two types of coverages (term and permanent), together. I think It will help people understand the relationship between the two how it doesn't have to be an either or.
If you want stay on top of the content and learn more about financial strategies that will help you plan and protect your financial future, then you should check out my YouTube channel as well as Stephen Spicer's.
Until next week,