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What Is Modified Whole Life Insurance?
What is modified whole life insurance? It’s a variety of whole life insurance that covers you for your entire life, with premiums that start at a low introductory rate. Once that rate ends, your payments will increase and stay at that higher rate for the rest of the time you own the policy. If you’re low on cash now but want lifelong coverage, modified whole life is an option. We’ll look at how it works and some pros and cons below.
What Is Modified Whole Life Insurance?
As the name suggests, it’s a form of whole life insurance. Unlike term policies, whole life covers you until the day you die. As long as you keep the policy in force by paying your premiums, it won’t expire. That means your loved ones are guaranteed to get that death benefit payout when you pass away.
And like other forms of permanent coverage, modified whole life also contains a cash value component. The insurer places a small portion of your payments into your cash value account. This grows over time at a set rate of interest. That growth is tax-deferred, meaning you’re not taxed as your cash value grows in your account. Later, once it’s had time to grow, you can use that cash value to pay your premiums or withdraw it to use however you want.
Lower Payments Now, Higher Payments Later
The change in premium payments is the defining feature of modified whole life. In most cases, the low payments last for a few years – carriers will offer anywhere from two to 10 years at this lower introductory rate. After that point, your payments go up and remain at that higher rate.
So…what is modified whole life insurance designed to do? Those lower initial payments help you afford more coverage than you could otherwise get with your current budget. The assumption here is that although the higher payments might be unaffordable right now, you’ll have more income and be better able to afford them in a few years. It’s a way to lock in additional coverage without having to wait.
Modified Whole Life: Pros
What is modified whole life insurance going to do for you that another type of coverage can’t? Let’s take a look:
- Underwriting may be minimal, depending on the insurer you choose. Some insurers have modified whole life policies that function more like a final expense policy. That means the underwriting is less strict, and you can qualify even with relatively serious health issues.
- You can buy more coverage than you can afford while you’re healthy. There’s always the chance that, if you waited until you could afford more coverage, you could develop a health problem in the meantime that would make that coverage unaffordable. With modified whole life, you can secure more coverage now.
- Even if you develop health problems later, the coverage can’t be cancelled. This is a benefit of any permanent life insurance policy, not just modified whole life. Because it covers you until the day you die, the price you pay is set when you buy the policy. No matter what happens with your health, the insurer can’t cancel your coverage or renegotiate the price based on your new health circumstances. All that is locked into place at the time of purchase.
- Your beneficiaries get the full death benefit no matter when you pass away. If, for example, you pass away during the period with low introductory payments, your beneficiaries still get the full face value of your policy as the death benefit.
Modified Whole Life: Cons
On the other hand, there are a few things to consider that might mean modified whole life isn’t the right type of coverage for you. Consider these points:
- You may not be able to grow cash value during the introductory period. Not all insurers will let you grow cash value when you’re paying low introductory rates. Remember, cash value grows with a portion of each payment you make. But since you’re paying lower premiums, all those dollars are going toward the cost of the coverage. Only later will there be anything left over to fund your cash value account. That means you’ll be missing out on several years of compounded interest.
- The higher premiums may still be unaffordable later. If you’re buying modified whole life because you’re planning on having more income in a few years, there’s always the chance things won’t go according to plan. If you still can’t afford the higher payments later, would you be forced to surrender your policy? If so, ask yourself: what is modified whole life insurance providing that’s worth my loved ones losing the chance for a guaranteed death benefit?
- You may pay more overall than if you’d bought a standard whole life policy. Depending on how the carrier structures their payment amounts, you may end up paying more for modified coverage. For example, if a standard whole life policy were $500 per month, a modified policy might offer the low introductory rate of $200 per month for 3 years, followed by the rest of the policy at a rate of $700 per month. Yes, that introductory rate is nice – but over time, you’ll pay more than if you’d just bought the standard policy.
Evaluate Your Options: Term Life, Whole Life, Modified Whole Life
If you’re shopping for a policy, you have to ask yourself: what is modified whole life insurance going to get me that standard whole life or term life can’t?
If it boils down to affordability, consider a term life policy instead. The cost is much lower (hundreds per month), and with new longer term lengths of 35 and 40 years, you can protect your loved ones for longer. All for much less money!
If it’s non-expiring coverage you’re after, consider a standard whole life policy. You won’t get the lower introductory premium rate, but also won’t have to worry about a price hike in later years.
Another Option: Policy Stacking
One possible solution is policy stacking. This means buying two policies – one whole life policy that will never expire, combined with a lower-cost term policy to boost the amount of death benefit your loved ones would get if you pass away within the term.
Because we specialize in life insurance, we can help create a customized solution that meets your needs. If you’re on a tight budget, we can find ways to get you the most coverage the least amount of cash. Or if you’re more concerned with maximizing your cash value and death benefit amount, we can help you do that, too.
The best way to get the right policy is with an agent’s help. We’d love to talk! Call us at (800) 521-7873 or email us at info@lifequote.com and let’s get you covered.
