Whole Life Insurance: 101
Updated: May 31
Whole life insurance provides lifelong protection with valuable additional features.
Choosing the right life insurance solution for your situation is extremely important – but the process can feel overwhelming since there are so many different products available.
There’s term life insurance, which offers straightforward coverage for a specific number of years. There’s universal life insurance, which provides lifelong protection and includes the opportunity for tax-sheltered investment growth. Often less well understood is whole life insurance, which provides lifelong protection, like universal life insurance, but with different features.
How does whole life insurance work?
Whole life insurance is what’s known as a permanent insurance policy. Regardless of how long someone lives and whatever health issues that person encounters, beneficiaries will receive the guaranteed death benefit. The only requirement is that premium payments – often referred to as modal policy payments – must continue to be made according to a set annual or monthly schedule.
With some whole life insurance policies, beneficiaries may receive more than the death benefit, which is the face amount on the policy. They may also get the amount of “paid-up insurance.” This is extra coverage the policyholder bought either using the policy’s earnings or by depositing additional payments. In some policies, paid-up insurance only increases the death benefit. In others, it also increases the policy’s “cash value.”
The cash value is an amount that accumulates inside the policy which the policyholder can access while still alive. Not all whole life insurance policies have a cash value, but it is a useful feature that offers flexibility if the policyholder needs an extra source of funds. Some policies offer guaranteed cash values, providing helpful certainty for planning.
Many whole life insurance policies offer another useful feature: the choice to arrange to pay off the entire policy by a certain age (e.g., 90 or 100) or in a specific number of years (e.g., 10 or 20 years). The latter option, also known as limited pay, allows the policyholder to pay all the modal policy payments early on. This can help with planning because it ensures no more payments are due after retirement or at a time when someone anticipates needing funds for extra care at home or perhaps in a long-term care facility.
How do policies add value?
Different policies offer a variety of extras that can add value for policyholders, such as:
Allowing policyholders to make extra deposits that build cash value and/or face value
Offering annual performance credits that build the policy’s cash value and/or face value
Offering annual dividends that build the policy’s face value and cash value
Facilitating cash value withdrawals when needed – note that these withdrawals are generally subject to tax, but may be tax-free if the policyholder becomes disabled
Allowing the policyholder to use the cash value as collateral for a bank loan
Permitting the policyholder to decrease the policy’s face value as their needs change
It may also be possible to add features through riders – for example, increasing protection with term life insurance, including the option to skip payments if the policyholder becomes disabled, and protecting children and guaranteeing they will qualify for their own policies when they grow up.
Like all life insurance, whole life insurance can be part of an overall strategy to maximize your legacy, providing a guaranteed, tax-efficient death benefit that you can pass on to the next generation. It can also fund a sizeable charitable donation.
The cash value makes it possible to access money if needed – for example, to pay for unexpected costs such as home repairs or home care services. Also, the cash value grows on a tax-deferred basis, meaning taxes are due only on withdrawn amounts, making this a tax-efficient way to build wealth.
What’s a “participating" whole life insurance policy?
Policyholders “participate” in a participating whole life insurance policy by receiving dividend earnings from the life insurance company. The alternative is a non-participating whole life insurance policy in which policyholders do not receive dividends, but may, in some cases, receive a performance credit.
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