Samantha Kohn, Freelance Blogger
Life insurance provides peace of mind that your family will be financially stable in the event of your death. It allows a person to leave their beneficiaries with a pre-set sum of money to help the family cover their cost of living and get back on their feet when a loved one passes away.
There are many life insurance products to choose from, and it’s important to find an insurance expert you trust to walk you through the options and help you make the best choice for you and your family.
The two most common types of life insurance are term life insurance and whole life insurance. There are pros and cons to both, but this article will focus on whole life insurance, aiming to answer the question: Is whole life insurance a good investment?
Key takeaways on whole life insurance
- Whole life insurance is a permanent policy that's guaranteed to payout a death benefit when you pass, provided you pay all your premiums on time.
- Whole life policies accumulate in cash value – this is money you can access during your lifetime. There are different ways you can do this, such as receiving dividends, borrowing money, or withdrawing funds.
- Whether whole life insurance is worth it will depend on your specific case. It's typically best for those whose coverage needs won't change over time. Because it's more expensive, you may want to consider a term life policy for temporary coverage needs.
What is whole life insurance?
Whole life insurance is a permanent life insurance policy that provides coverage for your entire life if your premiums are paid on time. These premiums are guaranteed not to increase, even if you face a change in medical status. When you die, your beneficiary will receive the full amount of the policy, regardless of when the claim occurs.
For example, if you purchase a $2,000,000 whole life insurance policy when you are 30 years old and continually make your payments on time, your beneficiary will receive that full $2,000,000 payment when you die, regardless of whether you live to be 37, 63, or 81 years of age.
At the same time, if your premiums for that policy are $90.00 per month at the time of purchase, your monthly premiums of $90.00 will never increase even if you develop health complications as you age.
How can whole life insurance be used as an investment?
There is a savings component to whole life insurance, known as the policy’s “cash value.” The cash value grows at a guaranteed rate of interest over time as your insurance provider invests your excess premiums. This cash value can then be paid out in the form of dividends to the policyholder (if it’s a participating whole life policy) or accessed in the form of a loan.
Borrowing funds from your policy’s cash value allows you to free up capital that can be used as part of your investment strategy. If an exciting investment opportunity comes your way and you don’t have the cash available to jump in, you can borrow against the cash value of your policy assuming the cash value is high enough to cover the amount you need.
You can also permanently withdraw that cash value, but this will usually reduce the benefits your beneficiaries will receive when you die.
There are tax implications to borrowing or withdrawing the cash value of your whole life insurance policy, so be sure to speak with your accountant or insurance broker before making any moves.
Compare term and whole life insurance quotes with us
When is whole life insurance worth it?
Whole life insurance premiums are more expensive than term life insurance premiums, which is one of the main reasons so many people opt for term policies instead.
However, if you have a high income and purchase the policy when you are young and healthy, whole life may be the best option for you for three main reasons:
- Your premiums are guaranteed to remain stable, even as your health, wellness, and risk of dying increase with age.
- The policy death benefit will be distributed to your beneficiaries tax-free.
- Your policy can pay dividends, plus you can borrow against the cash value of the policy and use those funds to cover unexpected expenses, loss of income, or use it to invest.
When is whole life insurance not worth it?
While whole life insurance is a great option for people with high incomes that are looking for tax-deferred earnings, these policies are also typically more expensive and more complicated than other popular options like term life insurance.
The benefits of whole life insurance are not likely worth the extra premiums if you are purchasing a policy later in life, if you earn an average income or below, or if you believe your protection needs may change over time.
The bottom line
For many, purchasing a whole life insurance policy is one way to ensure that their family is protected financially in the event of their death. Whole life insurance policies offer many benefits like stable premiums for life, tax-deferred income, a death benefit that doesn’t change, and a cash value that is guaranteed to increase at a certain rate and from which the policyholder can withdraw dividends and borrow funds in the form of a loan.
However, the premiums for whole life insurance plans are higher than those for term life insurance plans, and the policies themselves are more complicated. These are the two main reasons why more people opt for term life policies than whole life insurance policies.
Read: Whole vs. term life insurance – which one is right for you?
So, if after reading this article you’re still wondering whether whole life insurance is worth it, the answer is that it depends.
If you are a young, healthy, wealthy individual beginning to strategically plan the long-term financial well-being of your family, a whole life insurance policy is a good option for you.
If you are middle-aged and earning an average income, talk to your insurance provider about a term policy.
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