Whole life insurance policies are designed to provide protection for a lifetime. They offer level premium cash value life insurance that allows riders for flexibility. There are various types of whole life insurance, but the following are common advantages and disadvantages.
- ADVANTAGES OF WHOLE LIFE INSURANCE:
- GUARANTEED LEVEL PREMIUMS – Most whole life insurance policies offer guaranteed level premiums for life. Some whole life insurance policies have step rate premiums.
- LONG TERM VALUE – Often whole life policies offer more value for the long run; especially as the insureds reach ages at or beyond life expectancy. Most reputable insurers guarantee 4 % to 5 % on the cash value accumulation account.
- GUARANTEED PROTECTION – Whole Life plans provide guaranteed protection as long as the premiums are being paid.
- INCREASING DEATH BENEFITS – The death benefit in participating (dividend paying) plans will increase over time; assuming no loans have been taken out of the policy.
- TAX-DEFERRED CASH BUILD-UP – Cash values in life insurance policies accumulate tax-deferred. Additionally, in many states the cash value is protected from creditors.
- FLEXIBILITY – Most whole life insurance plans allow riders and extra cash dump-ins which give the policy more flexibility. Additionally, by paying in extra premiums the policyowner may be able to stop paying future premiums.
- TERM RIDERS – Most whole life plans allow term life insurance riders. These riders, especially on children, provide an excellent way to provide needed coverage on a dependent at a much lower cost than it would be to buy permanent policies on each dependent.
- PAID-UP ADDITIONS – Many insurers pay dividends into the policy each anniversary after the first year. These dividends can be used to buy paid-up additions which increase the cash value and death proceeds.
- AUTOMATIC PREMIUM LOAN (APL) – Most whole life plans offer a free APL rider. If the policyowner changes premium modes and forgets payments, or cannot afford premiums at a certain period of time, if there is cash value available to meet the premium, the APL will pay the premium with funds available in the policy. Loans can also be done with forms or by calling the customer service representative.
- NON-FORFEITURE VALUES – By law permanent policies offer certain options in the event the policy lapses after premiums have been paid into the policy. These values include cash surrender value, paid-up insurance, or extended term insurance.
- DISADVANTAGES OF TERM LIFE INSURANCE:
- PREMIUMS ARE EXPENSIVE SHORT TO MEDIUM RANGE – The premiums on permanent plans such as whole life plans are much more expensive in the short run than term insurance. A 15 year term will almost always be a better value than buying a permanent policy for only 15 years.
- NO SIGNIFICANT CASH VALUES FOR SEVERAL YEARS – Most whole life insurance policies do not offer significant loan or cash surrender values in the first few years. Additionally, it often takes 10 to 20 years depending on the plan and age of the insured to have cash values equaled to the amount paid in. However, for people wanting 20 or 30 years of coverage with Return of Premium (ROP), they often are better values than ROP term insurance because they often provide more cash loan or surrender value, and they almost always allow the option to continue coverage for life at the same premium amount.
- SHORT-TERM INTEREST RATES – Whole life policies that are not variable plans are regulated in such a way that their interest rates are limited. However, the guaranteed interest rate is typically greater than that offered on one to five year Certificates of Deposit (CD) or Treasuries.
- NO MARKET RETURNS – Non-variable whole life policies do not allow for different market fund investment choices which can offer both losses and higher gains than the guaranteed interest rates of traditional whole life plans.
- MODIFIED ENDOWMENTS – If too much money is put into a life insurance plan it can become a Modified Endowment Contract (MEC) which would make withdrawals taxable until all the gain is realized. Additionally, MEC can be subject to IRS 10% penalties as are IRAs.
FOR MORE INFORMATION (see the following articles):
Your Life Insurance Choices? – This link addresses the various types of life insurance plans available, some purposes for their design, and provides links to information and quotes on various products and their uses.
What policy should I buy? – This link may help you decide which life insurance product is the best for you.