When you’re ready to pick up a life insurance policy, your two main options are term and whole life. A term policy can be great for covering major life events like pregnancy or buying a home, but many flock to whole life for the long timeframe and increasing cash value.
Unfortunately, too many people jump on one or the other without fully weighing the benefits compared to their unique situations. It’s worthwhile to consider the pros and cons of whole life insurance before creating a policy. So, here are the advantages and disadvantages you should know.
Understanding Whole Life Insurance
Whole life is a type of permanent insurance policy plan, which guarantees a payout after you pass instead of expiring at some point in your life. This type of policy varies from others in the way it increases its cash value.
A whole life policy includes the premiums you pay and a death benefit payout, both of which remain the same for the lifetime of your policy. It also includes a cash value that is built from reinvesting your premiums. The longer the policy stands, the higher the cash value increases.
While increasing cash value sounds great, there are several aspects to consider before making this investment. First, a whole life policy is far more expensive than a term one. How much more expensive? Premiums are anywhere from five to fifteen times as much as those for a term life policy.
Second, this is not a top-tier investment opportunity. Your premiums are invested by your insurer, often in a very conservative manner, which means your return on investment is lower than other options like a 401(k) or IRA. Policy management fees are also deducted from the money your policy earns.
On the plus side, you can count on consistency with this investment. Your insurer will give you a set rate at which your cash value grows, allowing you to accurately assess what its value will become. Regardless of the increase, your premium will always remain the same and your death benefit will never decrease.
That cash value also comes with options. You can use it to take out a loan, to pay your premiums, or reinvest it. Keep in mind, however, that borrowing against your death benefit will decrease its amount. Whatever the cash value is after your passing is gifted to your beneficiaries in addition to your death benefit, as well.
Who Needs A Whole Life Policy?
For most people, a term life policy is the affordable option for ensuring their loved ones are covered ion the event of their passing. With a smaller return on investment and higher cost, a whole life policy is more beneficial for those with a high net worth who routinely max out their other investments.
Whole life policies are also beneficial in instances where a term period doesn’t provide the financial protection someone needs. If you have a lifelong dependent, for instance, then lifelong insurance is a better way to provide for them in the event of your passing.
Outside of whole and term, you do have other options. Universal and variable policies offer more control over your cash value while remaining permanent forms of protection. At the end of the day, speaking with a licensed expert about your unique financial needs is the best way to determine what type of policy is right for you.