When shopping for life insurance, you have a wide variety of options to choose from, based on your individual needs and budget. Two common life insurance policy choices are term life insurance and whole life insurance.
Advantages of whole life insurance
Term life insurance is often considered a type of temporary insurance while whole life insurance is designed to cover you for the rest of your life (as long as premiums are maintained). Moreover, whole life insurance offers additional benefits that term life policies don't. Whole life insurance offers both death benefits to your beneficiaries as well as benefits that can be used while you’re alive. Some of the benefits of a whole life insurance policy are:
Lifetime insurance coverage
When a term life policy expires, your coverage ends. You are then left with the choice of either letting the policy expire, or purchasing a new policy based on your current age and health status. For example, if at age 30 you bought a 20-year term policy and you are now age 50, your term policy will end. You can buy another life insurance policy, but the premium will be based on your attained age and will therefore be higher. A key benefit of whole life is that it's considered a permanent life insurance policy. It's meant to provide you with a lifetime of coverage protection with premiums that won't increase, and a policy that doesn't expire after a specific number of years, and can't be terminated due to health or illness. However, timely payment of required premiums must be maintained to keep the policy in force.
Cash value, withdrawals and policy loans
Whole life insurance has a cash value component that may accumulate over time, and is one of the key benefits of owning a whole life insurance policy. With whole life, it's possible to borrow against some of the cash value in your policy (up to a limit) for any need that you may have. It's important to note that if you were to die unexpectedly, any outstanding loan balance remaining on your whole life policy may be deducted from your death benefit. Outstanding loan balances on your policy accrue interest while you're alive.
With a whole life policy, loans from the policy could be used for large expenses such as a child’s college tuition, purchasing a home, unexpected medical expenses or any other purpose.
Tax deferred growth
The cash value component of a whole life insurance policy grows tax deferred. That means that you don’t pay income taxes each year on the growth in the plan’s value. Taxes may apply when a policy is surrendered with a cash value that is greater than the total premiums paid. The benefit is that the cash value can potentially grow more quickly, as interest is applied to the full value amount rather than an amount reduced by taxes.
Flexibility as remium payments are maintained.
Another benefit of whole life insurance is its ability to offer you some flexibility. With its potential to accumulate a cash value over time, you have the option to use this cash for a variety of reasons. You might also choose to simply leave it alone with the possibility of increasing your policy's cash value over time.
Guaranteed death benefit
A whole life policy is designed to provide coverage for the policyholder’s whole life. That means that, unlike term life insurance, a whole life policy has a guaranteed death benefit as long as premiums are made, the policy is in force and there are no outstanding loans to reduce the death benefit.
Level premiums
The premiums on a whole life insurance policy remain the same for the life of your policy, regardless of your age or health.
Disadvantages of whole life insurance
It’s important to consider the drawbacks associated with a whole life insurance policy when considering which coverage may be best for you.
Expensive
Whole life policies are typically more expensive than term life policies of the same face amount.
Permanent
While a whole life policy provides coverage for your whole life as long as the policy remains in force, the death benefit on the policy is fixed. Whereas it is possible to adjust the death benefit with other types of policies, whole life policies are not flexible and may not meet your changing needs over time.
Limited growth
Whole life insurance policies will often accrue cash value at a lower rate than Universal life insurance policies. While not necessarily a disadvantage since rates are guaranteed with whole life, it is an important consideration.
Still have questions about the many benefits of owning a whole life insurance policy? We'll help you get the answers you need for questions about life insurance.
*As long as premium payments are maintained.
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