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Whole Life Insurance Pros and Cons
Whole life insurance pros and cons: can they help you make right decision? Absolutely. When you have a list of benefits and drawbacks, you can tally them up and see which makes more sense for your family, needs, and budget. So without further ado, let’s get started. Here's what we'll go over:
But First…What Is Whole Life Insurance?
Whole Life Insurance: Pros
Whole Life Insurance: Cons
Whole Life Insurance Pros and Cons: Summing Up
But First…What Is Whole Life Insurance?
Whole life insurance covers you for your entire life, no matter how long that may be. When you die, your insurer will pay the death benefit to your beneficiaries (income-tax-free, in almost all cases).
Like all permanent policies, whole life also contains a cash value account. Attached to your policy, the cash value functions like a savings account. A small portion of every payment you make gets put into this account. There, it grows over time with a guaranteed interest rate set at the time you buy your policy. Whole life policies are designed so that the cash value is intended to equal the amount of the death benefit by the time you reach age 100.
It can take a few years for your cash value to really start growing. That’s why some insurers only make it available to you after 2-5 years. The longer you’ve owned your policy, the more time your cash value has had to grow. If you buy a policy in your 20s or 30s, for example, and let it grow for another 30 years, it can provide a substantial source of supplementary retirement income later in life.
You can access that cash without paying any income tax, up to the total amount you’ve paid into the policy. If you withdraw more money than your cash value contains, it will reduce the death benefit that goes to your loved ones when you pass away.
Whole Life Insurance: Pros
There are a lot of whole life insurance pros and cons, but let’s start with the good stuff.
- Simplest and most popular type of permanent coverage. There are other types of permanent coverage – such as universal life – but whole life is the easiest to understand.
- No expiration date. Unlike a term policy, this policy cannot expire if you stay current with your payments. You don’t have to worry about outliving your term and having nothing to show for it. Your beneficiaries will get paid, period, whether you pass away in a month, a year, twenty years, or fifty years from now.
- Lock in your price now and it will never go up. Once you buy your policy, your monthly payment is set in stone. Even if you have a serious health issue later in life, the cost of your coverage will not change. If you’re young and healthy, now is a great time to lock in a low rate that’s guaranteed for the rest of your life.
- Guaranteed death benefit amount. Unlike universal life insurance (another type of permanent coverage), your death benefit amount is guaranteed. Your policy will pay out the full face value you purchased, minus any outstanding policy loans and their associates fees and interest.
- Build cash value. In terms of whole life insurance pros and cons, this is possibly the biggest pro. Your cash value account is a financial asset. If you’re looking to build a portfolio of diversified assets, this is a great way to start. Your cash value grows tax-deferred at a guaranteed interest rate and is a great source of extra money you can access later in life. You don’t have to do anything to grow this asset – there are no investments or choices you need to make. It simply grows, year after year, as long as you keep the policy active.
- Some policies pay dividends. Depending on the insurer you choose, your whole life policy may pay periodic dividends. Mutual companies, which are owned by policyholders rather than shareholders, share a portion of annual profits as a quarterly, semi-annual, or yearly dividend. If a policy is called “participating whole life,” that means you’ll get a dividend.
- Take cash value with you if you surrender your policy. Although we don’t recommend it, sometimes people decide they no longer need or want their whole life policies. If you surrender the policy (i.e., follow the insurer’s cancellation process rather than simply stop making payments), you can usually take the cash value with you. Restrictions may apply, including surrender fees and/or an insurer’s rules on how long you need to have owned the policy to generate any cash value.
- Use dividends or cash value to pay your premiums. If you’ve had your policy for awhile and built up enough cash value or received enough dividends, some insurers allow you to use it to pay your premiums. Just be aware exactly how long your cash value will last if you do this. You don’t want to accidentally let the policy lapse through lack of payment if you run through your cash value without realizing it.
- Access cash value multiple ways. You can usually access these funds two ways: through withdrawals or loans. A withdrawal is just what it sounds like – if you withdraw less than you’ve paid into the policy, you just take the money and you owe zero income tax. A loan is when you borrow against the cash value of your policy. Like other loans, you will be charged interest until the loan is paid back. However, this loan won’t appear on your credit report so you have a little more freedom to use your money how and when you see fit. No matter how you access your cash value, keep an eye on how it affects the amount of your policy’s death benefit; a quick call to your agent or insurer can help clear up any questions before you take action.
Whole Life Insurance: Cons
As with any financial decision, you have to look at the big picture to know if it’s right for you. In terms of whole life insurance pros and cons, here are the potential drawbacks you need to consider.
- Higher cost. In terms of whole life insurance pros and cons, this is possibly the biggest con. You’ll pay more for a whole life policy than a term life policy. If you’re on a tight budget, it’s a good idea to get quotes for both policy types, but expect the term life quote to be more budget-friendly.
- Whole life’s cash value doesn’t grow as quickly as other permanent policy types. If your primary goal is to build a financial asset, keep in mind that whole life will grow that cash value more slowly than, say, universal life. With universal life, you have options that apply different interest rates to some or all of your cash value. However, with whole life, that rate is locked in and usually quite modest – expect something higher than what you’d get from a traditional savings account. If you’re truly pursuing an accumulation strategy, another policy type may be more suitable.
- Tax may be due on cash value withdrawals or loans. You’re allowed to dip into your cash value to use for any reason you see fit. You can pull out as much cash as you need without paying any income tax on it – up to the total amount you’ve paid into the policy up to this point. If you pull out more than this, you may owe income tax on the amount that exceeds what you’ve paid into the policy. It’s something to be aware of – and it’s all up to you to know what tax ramifications of your decisions. Consult your tax professional to make sure you comply with all current tax law.
- Interest charged on cash value/policy loans. Insurers charge interest when you borrow against your cash value or the policy’s death benefit.
- Policy loans may reduce your death benefit amount. Some policies allow you to borrow against the cash value of your loan – up to more than is actually present in your cash value account. If you take out such a loan, you’ll owe a small amount of interest and you’ll need to pay that money back if you want your loved ones to receive the full value of the policy’s death benefit.
Whole Life Insurance Pros and Cons: Summing Up
If you want coverage you can’t outlive, whole life is a great choice. It comes with important guarantees, including your locked-in payment amount and death benefit amount. Those are the most important reasons to choose a whole life policy.
Every insurer will have slightly different rules for how and when you can access your cash value and how those methods of access affect the amount of your death benefit. Talk to your agent to make sure you understand the best times and ways to access that cash value. When in doubt, ask!
Here at LifeQuote, we’re happy to go over all the whole life insurance pros and cons with you. Call us at (800) 521-7873 or get a free quote to check out prices first.
