Guide To Whole Life Insurance
Whole life insurance is one type of permanent life insurance that can provide lifelong coverage. It provides a variety of guarantees, which can be appealing to someone who doesn’t want any guesswork after buying life insurance.
Whole life insurance combines an investment account called “cash value” & an insurance product.
Whole life insurance offers three kinds of guarantees:
- A guaranteed minimum rate of return on the cash value.
- The promise that your premium payments won’t go up.
- A guaranteed death benefit that won’t go down.
Whole life insurance very broadly to refer to any type of life insurance that can provide lifelong coverage. These policies work very differently from traditional whole life insurance and include:
- Universal life insurance.
- Variable life insurance.
- Survivorship life insurance.
Cash Value Accumulation in Whole Life Insurance
Premium payments for whole life insurance will accumulate in a cash value account & which grows over time & can be accessed.
The money in the cash value account grows tax-free. If you take out cash value that includes investment gain & through a policy withdrawal or loan & that portion will be taxable.
The accumulation of cash value is the major differentiator between whole life & term life insurance.
While actual growth varies from policy to policy & some take decades before the accumulated cash value exceeds the amount of premiums paid.
Only a small portion. The rest goes to paying for the insurance itself & expense charges.
Most whole life policies have a guaranteed return rate at a low percentage & but it’s impossible to know how much your cash value will actually grow.
You can choose to apply your dividends to cash value every year & but you can’t know how much that will amount to over time.
Having reviewed several dozen policies, guaranteed rates of return are often 1% to 2% & with non-guaranteed rates at about 4% to 6% annually.
It would take 35 years, according to the guaranteed rate projections & for the policyholder’s cash value to exceed what she had paid in premiums.
It’s unclear what percentage of policyholders get returns closer to the “non-guaranteed” rates.
Using the Cash Value
You can tap into cash value with a withdrawal or a loan. If you take a loan & it’s tax-free & you can pay it back & with interest.
If you make a withdrawal & there are no taxes as long as your withdrawal is less than the portion of your cash value that’s attributable to premiums you’ve paid.
If your withdrawal is greater & you’ll owe taxes on the difference because those are investment gains.
Outstanding loans and withdrawals will both reduce the amount of death benefit paid out if you pass away.
That’s not necessarily a bad thing & one of the reasons to buy a whole life insurance policy is to get cash value, so why let the money sit there without ever using it?
While the cash value is there & you want to be sure that you know all the ramifications of accessing it prior to making any decisions.
Picking Life Insurance Beneficiaries
When you buy a policy you’ll designate one or more beneficiaries to receive the death benefit & You don’t have to split the payout equally among beneficiaries.
You can designate the percentage for each, such as 75% to Mary & 25% to John.
It’s also a good idea to also designate one or more contingent beneficiaries. These folks are like your backup plan in case all the primary beneficiaries are deceased when you pass away.
Designating beneficiaries is an important task & as is keeping your designation up to date with your wishes.
The life insurance company is contractually obligated to pay the beneficiaries named on the policy & regardless of what your will says.
It’s wise to check once a year to verify your beneficiaries still reflect your wishes.
What Happens When You Die
A major selling point of whole life insurance is that it will be in force until your death. You can’t outlive the whole life policy as long as you’ve paid the premiums.
The policy pays out only the death benefit, no matter how much cash value you’ve accumulated.
The insurance company & remember that outstanding loans and past withdrawals from cash value will reduce the payout to your beneficiaries.
Some policies allow you to purchase a rider that gives your beneficiaries both the death benefit & the accumulated cash value.
This provision also means you’ll pay higher annual premiums & as the insurance company is on the hook for a larger payout.
Whole Life Insurance Costs
While some of the cash value features and the permanent nature of whole life insurance sound appealing & for many people & whole life insurance is simply unaffordable.
Many life insurance shoppers look at term life vs. whole insurance costs.
That said, we found that a $500,000 40-year term life policy from Legal & General would cost about $700 a year for a healthy 30-year-old male.
A $500,000 whole life policy from American National would cost about $4,060 — or 5.8 times more. Price differentials will vary according to age and coverage amount.
Top Sellers of Whole Life Insurance
Below are the biggest sellers of in alphabetical order. The list is based on annualized premium in the first three quarters of 2019, according to LIMRA, a research group for the financial services industry. See our ratings to find the best life insurance companies.
- Gerber Life Insurance Co.
- Guardian Life Insurance Co. of America
- MassMutual Life Insurance Co.
- Mutual of Omaha Cos.
- New York Life
- Northwestern Mutual
- OneAmerica Financial
- Penn Mutual
- State Farm Life