WHOLE LIFE INSURANCE
Permanent Or Whole life insurance What it is and how it works?
Life insurance policies can be categorized into two main types: term life and permanent life. In the event of your passing, both types provide your beneficiaries with a tax-free benefit payout.
Whole-life insurance: what it is and how it works?
Life insurance policies can be broadly categorized into two main types: term life and permanent life. Both offer the advantage of providing a tax-free benefit to your beneficiaries in the event of your passing. However, there are significant differences between the two.
Term life insurance provides coverage for a predetermined period, typically 10, 20, or 30 years. Once this term expires, the coverage ends.
On the other hand, permanent life insurance policies offer lifelong coverage, ensuring that a benefit will be paid regardless of when you pass away, as long as premiums are paid. Additionally, permanent policies have a valuable feature: they accumulate cash value. A portion of your premium payments goes into a cash account, where it grows tax-deferred over time. This cash value can be accessed while you are still alive and can serve various purposes. As the cash account grows, it can become a substantial asset that can be borrowed against with tax advantages, used to pay premiums, or even surrendered for cash, potentially helping to fund your retirement.
There are two main types of permanent life insurance: Whole and universal life
Both types offer lifelong coverage and include a cash value component, but they diverge in various other aspects.
Whole Life Insurance VS Universal Life Insurance
| Whole Life Insurance | Universal Life Insurance |
|---|---|
| For people who want more guarantees | For people who want more flexibility |
| Premium is guaranteed. The premium payments never change or increase with age, so you always know the cost. | Premiums can vary. You can raise or lower your payments within certain limits, making it easier to keep your coverage if your circumstances change. But you may eventually have to pay higher premiums to keep your policy in force. |
| Cash value growth is guaranteed. A whole life insurance policy builds tax-deferred cash value at a guaranteed rate over the life of the contract. So you know it will be worth at least a predetermined amount if you want to access the policy’s cash. However, it could also grow faster if the policy qualifies for dividends | Cash value growth can vary. The cash account growth is also tax-deferred. Despite having a guaranteed interest rate, because of the premium flexibility, the projected future guaranteed cash value may change over the course of coverage. |
| There’s a guaranteed death benefit. However, the payout will be reduced if there are outstanding policy loans when the policyholder passes away. | The death benefit can vary. A universal life policy may allow you to change the amount of your death benefit. |
| Whole life insurance policies cost more than universal life. | Universal policies are less expensive than comparable whole life policies. |
How is cash value accumulation managed within a permanent life insurance policy?
Cash value within a permanent policy experiences tax-deferred growth. However, the growth dynamics differ depending on the specific type of permanent policy, much like funds in a bank savings account grow differently than those in a brokerage account.
Whole Life Insurance: In whole life insurance, cash value grows at a guaranteed interest rate. If you obtain your policy from a “mutual” insurer, you may also receive dividends, enhancing the cash value growth beyond the guaranteed rate. Mutual insurance companies are owned by their whole-life policyholders who may qualify for annual dividends based on policy cash value and company performance. While dividend payments can’t be guaranteed, most Mutual Companies have consistently paid them to customers every year since. These dividends can significantly boost your cash value, potentially making a substantial contribution to your overall wealth.
Universal Life Insurance (UL): Unlike whole life insurance, universal life policies do not yield dividends, even with mutual insurers. Cash value growth in standard UL is variable due to a fluctuating interest rate. For those open to assuming greater investment risk, there are two UL variations offering the potential for even more substantial growth because the investment component relies on market returns:
Variable Universal Life Insurance (VUL): With VUL, you can link cash value growth to grouped stock market and bond investments known as “subaccounts.” However, growth in a variable life insurance policy is not guaranteed, as it is in standard universal or whole-life policies. As the policyholder, you bear the investment risk, similar to a brokerage account.
Indexed Universal Life Insurance ( IUL): Indexed UL allows you to tie some or all of your cash value growth to the performance of a broad securities index, like the S&P 500. There are minimum and maximum rates of return limits, ensuring you don’t capture all the gains but also don’t incur all the losses of your reference index
How Permanent Policies Calculate Cash Value Growth:
| Whole-Life | Standard Universal Life (UL) | Variable Universal Life (VUL) | Indexed Universal Life (IUL) |
|---|---|---|---|
| Calculation Method | Guaranteed fixed interest rate, plus potential dividends with a mutual company | Current market interest rates, but guaranteed not to go below a minimum set in the insurance contract | Based on the performance of subaccount investments you choose, which are similar to mutual funds. You enjoy any gains and assume the risk for any losses. |
| Interest Rate | Guaranteed fixed interest rate, with potential dividends from a mutual company | Variable, influenced by current market interest rates, with a guaranteed minimum | Variable, linked to the performance of chosen subaccount investments |
| Dividends | Potential dividends from a mutual company can enhance cash value growth | No dividends | No dividends |
| Investment Risk | Generally lower risk due to guaranteed interest rate and potential dividends | Moderate risk due to market-linked interest rates but with a guaranteed minimum | Higher risk as it depends on the performance of chosen investments |
Living Benefits: 4 ways to use cash value while you're still alive within permanent life insurance policies
| Access Method | Description | Considerations |
|---|---|---|
| 1. Surrender | You cancel the policy and take the cash surrender value payment. However, you’ll no longer have life insurance protection. With a newer policy, there can be significant surrender fees and/or taxes, so it’s generally not advisable before retirement age since there are other ways to use policy funds. | Cancelling the policy means losing life insurance coverage. – Potential surrender fees and taxes, especially with newer policies. – Not recommended before retirement due to alternative options. |
| 2. Withdrawal | You can typically withdraw cash from your permanent policy, and the money is non-taxable as long as it’s less than the amount paid into the policy. However, the death benefit will usually be reduced, and the reduction may be greater than the amount withdrawn, depending on the terms of your policy. | Withdrawals are non-taxable up to the amount paid into the policy. – Reduction in the death benefit, potentially greater than the withdrawal amount. – Terms of the policy influence the withdrawal process. |
| 3. Loans | You can use your policy cash value to secure a loan that grows at a fixed or variable loan rate set in the contract. Rates can be competitive or lower than a personal loan, and there is no application or credit check. You can even choose not to repay, but the outstanding loan balance will normally be deducted from your death benefit. | Competitive or lower loan rates compared to personal loans. – No need for application or credit check. – Option to not repay, but outstanding balance impacts death benefit. |
| 4. Premium Payment | You can often use your cash value to pay part or all of your premiums, especially after you retire. This can make it much easier to keep your coverage intact if your income declines when you are no longer working. | Convenient way to maintain coverage during retirement or reduced income. – Cash value helps cover premium costs. – Enhances financial security by ensuring continued coverage. |
These methods offer flexibility for policyholders to access the cash value while alive, but each comes with specific considerations regarding the impact on coverage, taxes, fees, and the death benefit.
Pros and Cons of Whole-life Insurance vs. term life insurance
| Aspect | Permanent Coverage | Term Coverage |
|---|---|---|
| Income Tax-Free Death Benefit | Yes | Yes |
| Cost | Higher | Lower |
| Coverage Length | Lifetime | Temporary |
| Cash Value | Yes | No |
| Policy Loans | Yes, typically | No |
| Health Exam Required | Yes, typically | Yes |
| Estate Planning Benefits | Yes typically | No |
| Customizable Riders | Yes | No |
This simplified comparison highlights key factors to consider when choosing between permanent and term life insurance, including costs, coverage length, cash value, and other policy features.
How much does permanent insurance cost?
Many factors impact the cost of life insurance, including age, gender, tobacco use, overall health, and the amount of coverage. But in general, permanent life insurance costs significantly more than term life insurance because it provides considerably more benefits – and can be used in ways that term life can’t. Also, whole life insurance rates tend to be higher than universal life. Your specific policy cost will vary, but the following charts show typical rates for healthy male and female nonsmokers at different ages. Note that no matter what kind of coverage you want, the younger you are, the less you’ll pay.
$500,000 coverage – Average Monthly Premiums for Women
| Age | Term | Universal | Whole |
|---|---|---|---|
| 30 | $16 | $125 | $313 |
| 40 | $24 | $187 | $467 |
| 50 | $54 | $320 | $733 |
$500,000 coverage – Average Monthly Premiums for Men
| Age | Term | Universal | Whole |
|---|---|---|---|
| 30 | $19 | $144 | $355 |
| 40 | $28 | $219 | $541 |
| 50 | $69 | $359 | $856 |
These charts provide typical average monthly premiums for women and men at different ages for $500,000 coverage in term, universal, and whole life insurance policies.
1 Source: https://www.nerdwallet.com/article/insurance/average-life-insurance-rates Accessed 08/15/2022
2 Source: https://www.nerdwallet.com/article/insurance/universal-life-insurance Accessed 08/15/2022
Permanent life policies can be customized to suit your specific needs
While both term life and permanent policies offer optional provisions called “riders” for added protection and benefits, permanent insurance policies typically offer a wider range of riders and customization options because they are designed to cover a lifetime of possibilities. Here are some of the rider options to discuss with your financial professional:
Waiver of Premium Rider: If you become disabled and cannot work, this rider will cover your entire premium, ensuring that your policy remains in effect. There is a similar rider called “Waiver of Cost of Insurance” that covers the death benefit portion of your premiums, excluding the cash value portion.
Accelerated Benefit Rider: This rider provides the option to receive a portion of the death benefit while you are still alive if you become terminally or chronically ill (unable to perform at least two out of six Activities of Daily Living – ADL).
Guaranteed Insurability Rider: This rider allows you to increase the size of your death benefit at certain times without needing to provide evidence of insurability or undergo a new medical exam. It enables you to secure lower rates now and obtain a larger policy in the future. Guardian offers up to eight option dates throughout your life for purchasing additional coverage.
Is It Possible to Cash a Whole-life Insurance Policy?
Absolutely. Permanent life insurance, whether it’s whole life or universal, accumulates cash value that can be utilized through various methods based on the policy’s conditions. One option is to “surrender” or cash out the policy. Nonetheless, this means you’ll forfeit your life insurance coverage, and surrendering the policy before reaching retirement age may incur substantial penalties. Fortunately, there are alternative ways to tap into the policy’s cash, like taking out a loan (without the need for repayment) or using the cash value to cover your premiums.
Will my beneficiaries receive both the cash value and the death benefits if the cash value remains untouched during my lifetime?
The total face amount comprises both the cash value and the initial face amount agreed upon.
Should You Speak with a Life Insurance Professional About Your Needs?
The cost of life insurance increases as you get older, making it wise to consider obtaining a policy sooner rather than later. Permanent life insurance serves as a valuable financial tool that safeguards your family and lifestyle while also accumulating cash value for future needs. However, every individual’s situation is unique, and creating a customized permanent life insurance plan that meets your specific requirements and those of your loved ones requires professional guidance. Therefore, it is beneficial to consult with a financial professional who specializes in assisting individuals in obtaining whole life insurance coverage. Get matched with a vetted advisor.
Our advisors will help you figure out the right type and amount of life insurance for your goals and budget.