Life insurance can be a difficult subject. The subject is complicated, the options are many, and we are often uncomfortable planning for the end of life. Also, while most people recognize the value of life insurance, many are unaware of how life insurance works and which type is best for them. Whole life insurance is a great option for some people, but you will have many plans to choose from. Read this guide to find out which options are right for you.
What Is Whole Life Insurance and How Does It Work?
Whole life insurance is a universal insurance policy guaranteed to remain in force for the life of the insured as long as premiums are paid. When you first apply for coverage, you agree to a contract in which the insurance company promises to pay your beneficiary a certain amount of money, called a death benefit, when you die. You will choose your coverage amount and your premium based on several factors such as your age, gender and health status. As long as you pay your premiums, your life insurance policy will remain in force and your premiums will not change, even if your health or age changes.
For example, let's say you buy a whole life insurance policy at age 40. When you buy the policy, the premiums will not change over the life of the policy as long as you pay them. They will be higher than the premiums for a term life insurance policy because your entire useful life is factored into the calculation.
Unlike term insurance, whole life policies do not lapse. The policy will remain in effect until your death or until you cancel it.
Over time, the premiums you pay on the policy begin to build cash value that can be used under certain conditions. The cash value can be withdrawn as a loan or used to cover your insurance premiums. All loans must be paid off before you die or they will be deducted from the policy's death benefit.
How Does the Cash Value Benefit Work?
Whole life policies are one of the few life insurance plans that generate cash value. Cash value is generated when premiums are paid: the more premiums paid, the higher the cash value. The main benefit of cash value is that it can be withdrawn in the form of a policy loan.
For example, if you have been paying premiums for many years and have an unexpected medical bill or financial obligation, you can call your insurance company and see how much you can withdraw from your policy. As long as the loan and interest are repaid, the full amount of your policy coverage will be paid to your beneficiary. If the loan is not repaid, the death benefit will be reduced by the outstanding balance of the loan.
Does Life Insurance Work as an Investment?
Although whole life insurance policies act much like an investment vehicle, because of the cash value they accumulate, you should not use any type of life insurance as an investment. True investments are highly regulated and have safeguards in place to protect investors. While life insurance is also highly regulated, its regulations have little to do with the financial sector.
Instead, you should view whole life insurance as protection that protects your loved ones from experiencing a financial burden when it happens. The death benefit can help ensure that you don't have to dip into your savings or investments to handle your final arrangements.
What Does Whole Life Insurance Cover?
Whole life insurance covers the entire life of the insured. When you have a whole life insurance policy, you will provide a cash payment to your beneficiaries when you pass away.
Costs and Premiums
Whole life insurance is more expensive than term life insurance because the insurer is insuring you for your entire life, not just for a term. And as you get older, insurance gets more expensive.
Here is a chart showing examples of the costs of a whole life insurance policy.
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