What is Whole Life Insurance? Whole Life insurance covers you for your entire life. It is different from Term insurance which only covers you for the term of the policy, usually in increments of say 10 or 25 years for example. The other significant difference provided by a Whole Life insurance policy is that it builds up a cash value over the lifetime of the policy through an investment component.
When you purchase a Whole life insurance policy, a portion of your premium is invested by the life insurance company which is put into a tax sheltered plan so you do not have to pay any capital gains tax to the government as the investment builds over time.
Another feature of the Whole Life policy is the cash value component. You build this up over the life of the policy. At any time you can either withdraw the cash value or even borrow against what you have accumulated up to date.
You can also choose how you pay your premiums and can opt to pay either monthly, quarterly, or annual instalments. Also, if you canât pay the premium, the cash value you have accumulated can be used to cover the premiums so you are still covered and the policy remains in effect.
Whole Life insurance policies premiums are more expensive than Term Life insurance policies because of the investment feature. Generally though, the amount of death benefit you choose and the premium you pay do not change through the life of the policy.
Your Whole Life insurance policy has 4 different features which includes 1) Administration costs 2) Lump sum death benefit 3) Investment or savings component, and 4) The return or interest rate that is credited to your investment component. The premium is apportioned to the first 3 features of the Whole Life policy.
Whole Life Insurance Policy Options
Basically, you have 2 major options to choose from when purchasing a Whole Life Policy. These choices include:
1) Single Premium Whole Life Policy
A single premium whole life policy means that you pay a single premium up front. It is generally more beneficial if you have a good chunk of change to purchase the policy up front.
The policy also offers you a guaranteed rate of return on the investment portion of your policy and your death benefit remains fixed. This means that regardless of the state of the financial market you receive a minimum return which is guaranteed.
2) Interest Sensitive Whole Life Policy
An Interest Sensitive policy, like it name suggests, has a variable rate of return on the investment portion of the policy. This policy is more sensitive to the capricious nature of the investment market so you make more during bull markets, and less when theyâre hibernating like a bear market.
However, this type of policy offers you a greater amount of freedom in how the death benefit portion of the policy is managed as you can raise it higher during good times without having you premium altered.