What is Whole Life Insurance?

by Scott Sery on April 17, 2012

Just about everyone needs some sort of life insurance.  Those who do not have a family should maintain at least a small policy so if they pass away unexpectedly someone is not left with bills to funeral homes.  For those who have families the responsible thing to do is make sure there is a large enough policy to replace their income for the next 10 or 20 years.  But with so many choices on types of policies out there, many people are at a loss as to what to buy.  While the topic of term vs. permanent (or whole life) is hotly debated, just about everyone should have whole life as part of his or her portfolio.

Whole life insurance combines the protection of life insurance and savings.  During the life of the policy the death benefit will provide money to your heirs, while the cash value can be tapped in the event of an emergency or opportunity.  It is a great place to store money, and when a financially strong company is used the rate of return on the cash value can be comparable to other less risky investments.

The biggest benefit of whole life insurance is that it will be there to pay out when you die, assuming you kept current on the premiums.  While most term policies will expire worthless after a set number of years, or at a certain age, whole life stays in force until the date of death.  Simply put, term is for if you die; whole life is for when you die.  This is where a small policy comes in handy, the rest of the assets can be passed on to heirs, and the insurance benefit can be used to pay final costs.  For those with a larger net worth whole life is a great estate-planning tool that can be used to minimize the effects of the estate tax.

The biggest downside of whole life insurance is the cost.  Most policies cost about 10 times their term counterparts, thus the reason many financial professionals advise people to stay away from them.  Unfortunately most of the insurance companies out there are great at managing term policies, and not so great at managing whole life policies.  So the entire product gets a bad name.  But finding those strong companies will help the insured get the most bang for his or her buck.  The cash value of the policy can be accessed at any time, but if it is withdrawn it will be taxed (the portion above what has been paid in premiums is taxable).  This is where the advisor should come in to talk about alternative ways to access the money.

If you want to buy a whole life policy, be prepared to hang on to it for quite a few years.  The first several years go into getting the policy rolling, only after 5 to 7 (for most policies) will the insured start to see good returns in the cash value.

Do a lot of research on the companies before buying.  Many companies will illustrate outstanding rates of return, only to have hidden fees that offset those returns.  There are third party analyses available.

Find a trusted advisor.  Ask around and find out who comes highly recommended.  Then go to them for advice.  Do not be afraid to walk away if they try to push a product you do not want.

Whole life can be a great part of anyone’s financial plan, as long as it is used properly.  Since the cost is a deterrent, a lot of advisors will recommend a small whole life policy, supplemented by a larger term policy.  Before buying, know exactly what you are getting into, and then enjoy knowing you and your family are protected.

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Scott Sery

Scott Sery is a native to Billings, Montana. Within an hour in nearly any direction he can be found fishing, hunting, backpacking, caving, and rock or ice climbing. With an extensive knowledge of the finance and insurance world, Scott loves to write personal finance articles. When not talking money, he enjoys passing on his knowledge of the back country, or how to live sustainably. You can learn more about Scott on his website Sery Content Development
  • thisthatand themba

    I never really understood the various types of life insurance. I usually let our advisor recommend one for us. This post was very insightful on what exactly whole life is.

  • I love posts that educate readers!

    I’m an investment advisor and I’m licensed to sell insurance but I wouldn’t go so far as to say that EVERYBODY needs whole life. First, if I’d recommend a permanent policy I’d probably lean towards CVUL (cash value universal life) as whole life does a terrible job of building cash value.

    With that said, whole life does fit in certain circumstances. I’ve never sold a whole life policy but one situation where it would come into play is for an older person (50+) that has little assets and couldn’t save up enough money to cover burial costs. It’s also viable for legacy planning but again, I’d probably consider CVUL first.

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  • Alexa Hansen

    The biggest benefit for a whole life insurance policy is the cash value component. As an employee of AccuQuote Life Insurance, I know that whole life is not for anyone. You have to be willing and able to pay for the high premiums as well as be patient as your money slowly grows in its savings vehicle. The nice thing about the cash value is that you can withdraw from the account if you need it for an emergency. As always, it’s best to do your research before purchasing any type of life insurance policy so you are adequately covered when you do buy.

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