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You don’t want to leave your family without any resources to deal with the financial implications of your death, so it’s important to invest in a life insurance policy — typically, either term life or whole life insurance. After all, life insurance can kick in to replace your income for years or even decades after you’re gone, and the death benefit from your policy can be used to cover your final expenses and debts your family has accrued.
Traditional term life insurance is the most popular type of coverage, but some consumers need more than a policy that only lasts for 10 to 30 years. An alternative is to buy whole life insurance that lasts for — you guessed it — your whole life.
Whether whole life insurance is best for you depends on your needs and goals, so keep reading to learn more about whole life insurance, how this type of coverage works and who it’s best for.
How does whole life insurance work?
Whole life insurance is a type of permanent life insurance that’s meant to last until the day you die, regardless of age. According to the Insurance Information Institute, whole life is the most common type of permanent life insurance purchased — other types of permanent coverage include variable life insurance and universal life insurance.
With most whole life insurance policies, consumers pay the same premium for the duration of their policy. Meanwhile, the death benefit typically also stays the same, regardless of how long you live. Obviously, this means that while whole life insurance premiums don’t become more expensive as you age, the overall total cost of your whole life policy gets larger and larger as you get older and have to continue submitting another premium payment each month.
But your family will receive the death benefit of your policy no matter how long you live, unlike term life insurance that only lasts for a set period of time. And whole life insurance policies also build cash value, and that cash value increases over time as you pay your premiums.
How much does whole life insurance cost?
If you want life insurance that lasts your entire life and also builds cash value, you can expect to pay a lot more for coverage than you would for a more restrictive policy. In fact, a whole life policy could easily have premiums that are 10 times higher than you would pay for the same amount of term life insurance coverage.
How much will whole life insurance set you back? While rates vary among insurers, based on a recent search at USAA, a 30-year-old woman living in New York and in excellent health could qualify for $250,000 in whole life insurance for about $143 per month. Meanwhile, prices surge to over $277 per month for twice the coverage.
Compare those prices to term life insurance, which is much less expensive overall. With an online provider like Haven Life, the same woman could buy a 20-year term policy worth $250,000 for as little as $12 per month, or a $500,000 policy with the same term for as little as $17 per month.
The benefits of whole life insurance
With whole life insurance costing significantly more than term life insurance, why do people buy it? Well, there are many advantages that come with buying whole life insurance, starting with the fact that the death benefit is guaranteed as long as you pay your premiums.
If you worry that your loved ones will struggle financially or not have enough money for your final expenses when you die, then having a guaranteed death benefit for your entire life is a huge advantage that may be worth the added cost.
Also, while your premiums may seem expensive when you’re young and in good health, they could be relatively affordable in relation to your death benefit once you reach an advanced age. That’s another big advantage of whole life — your premiums will always remain the same, even as your age increases and your health declines.
And don’t forget that whole life comes with a savings component that builds cash value. The cash value of your policy grows each month that you pay for whole life insurance, since a part of your premium is set aside. In most cases, this amount becomes accessible for you to use for any reason.
Meanwhile, some whole life companies also pay dividends. Any dividends you receive can add to the cash value of your policy. Depending on the insurer, you may even be able to use your dividends to pay for part or all of your insurance premiums.
Finally, whole life insurance comes with tax benefits, including the fact that your beneficiaries will likely receive your death benefit without having to pay income tax on it. If you’re a high-net-worth individual who wants to pass on tax-free money to your heirs, a whole life insurance policy can help you do that.
Can I cash out or borrow from my whole life insurance policy?
Generally speaking, the cash value growth you build in your policy can be accessed tax-free while you’re alive. Many customers also borrow against the cash value of their whole life insurance policies, which they can do without paying income taxes. However, the rules regarding how and when you access the cash value in your policy can vary, so you’ll need to check the details with your insurer.
Also, you’re never stuck with a whole life insurance policy. You can surrender your policy at any time, stop paying your premiums and in most cases take out the cash value that’s accrued. However, you’ll likely owe income tax on any amounts you receive this way, so make sure to speak with your whole life agent or a tax adviser before you take this step.
Should you buy whole life insurance?
As you get ready to choose a whole life insurance policy, make sure you invest the time and effort required to shop around. Compare whole life premiums with at least three different life insurance companies, and find out what it would cost for a similar amount of term life insurance coverage as well.
At the end of the day, whole life insurance is more likely to be utilized by higher-net-worth individuals since the premiums are so much more expensive, but it can be an asset for anyone who wants to make sure money is left behind for their heirs. So while you’ll pay more for permanent life insurance, the peace of mind can be worth the cost.
Not sure if whole life insurance is right for you? Read CNN Underscored’s guide to the different types of life insurance.