Provided that monthly premiums are maintained until a pre-specified age in the agreement, a whole life insurance policy is specifically designed to pay out upon death. Once this age is reached, a whole life policy continues for the remainder of the insured’s life. Part of the premium goes towards providing coverage and the remainder is placed in the provider’s investment portfolio. It is amongst the leading alternatives to level term insurance, which only provides coverage for a defined period of time.
Advantages of Whole Life Insurance
Coverage for life. Unlike term insurance, the insured will be covered for the entirety of their life. This means that they will receive a payment upon death regardless of whether they die at 25 or 90.
Tax free. The payment upon death will normally be completely free of income tax. The benefits can also be made payable to someone outside of that person’s estate.
Guaranteed premium. The premium is set at a fixed level and will not change at any point.
Cancellation of the policy. The insured is able to cancel a whole term life insurance policy at any time and have the cash value returned to them.
Disadvantages of Whole Life Insurance
Cost of coverage. As the likelihood of death increases with each passing year, the cost of whole term life insurance will be greater. This could create affordability issues for many families. Level term insurance may offer a cheaper alternative.
Wrong policy. Not everyone needs insurance for the rest of their life. Many advisors have sold coverage that is inappropriate for that individual in order to earn a healthy commission.
Use as an investment. Many people take out coverage for the wrong reason. Whilst whole of life insurance could act as an investment, its cash-in value is low compared to other alternatives. Despite the fact that the returns are guaranteed, the stock market has historically offered a far better return.
Inflexible investment. It isn’t possible to improve the return by investing in different stocks or bonds as the entire process is handled exclusively by the policy provider.
Pros and Cons of Whole Term Life Insurance
Although the cost of whole life insurance is higher, the insured will benefit from coverage for the remainder of his/her life. A whole life policy may not be appropriate for all families. It may be that coverage is only needed until the mortgage is cleared or until the children have completed their education. If this is the case, level term insurance and/or a critical illness insurance policy may be more appropriate.
How to Select a Life Insurance Product
There are several life insurance products available so making the right choice from the outset is fundamentally important. Given that it isn’t possible to predict the future, term life insurance vs. whole life insurance is one of the most important decisions a family will make. Whilst there are two main types of mortality coverage, there are a number of subtle variations of these policy types.
Level Term Life Insurance
Term coverage is an affordable alternative to whole life insurance for those working with a limited budget. This life insurance product is normally taken out to protect a young family over a 20 or 25 year period. Although level term life insurance has no investment element or cash-in value, it can provide a substantial cash lump sum in the event of death. The cash value is guaranteed, although the provider may exclude certain pre-existing medical conditions.
Decreasing Term Insurance
Those seeking to clear their repayment mortgage in the event of death may decide to take out this variation of term coverage. Given that the outstanding mortgage goes down following each repayment, the amount of insurance needed doesn’t need to be as great. This helps greatly in terms of affordability.
Whole Life Insurance
Unlike level term life insurance, a whole life policy is designed to provide coverage for the entirety of the insured’s life. This is achieved by investing a portion of each premium in order to generate a substantial sum cash sum. This money is used to cover future premiums and provide enough money for when the policy needs to pay out. A whole of life insurance policy is typically used to provide money for a loved one when they die and/or as part of an inheritance tax avoidance strategy. Whilst it shouldn’t be considered to be an investment, the policy does have a cash-in value.
Universal Life Insurance
Subject to a guaranteed minimum, the value of the cash fund accrues a rate of interest based on the performance of the money markets Whilst the world financial markets can be erratic, bonds, mortgages and money market funds are far more stable. The period of time that a universal life insurance fund is invested for serves to even out any peaks and troughs in the overall performance.
Universal Variable Life Insurance
Variable Universal Life insurance (VUL) is a subtle variation of the whole life policy theme. Whilst the provider of the life insurance product normally handles any investments, a VUL allows the insured to decide precisely which funds and bonds the proceeds of their monthly premiums are invested in. Whilst this does carry a greater risk, it can also allow those with a good understanding of finance to considerably improve their returns. As opposed to level term life insurance, the policy can be cashed-in at any time.
Term Life Insurance vs Whole Life Insurance
Which life insurance product is the right option will depend heavily upon affordability. Whole life insurance is considerably more expensive than level term life insurance. A whole life policy is normally taken out to provide a lump sum regardless of the age of death and/or to help avoid the payment of inheritance tax. However, someone seeking to protect a young family or clear their mortgage is likely to be better suited by a level or decreasing term insurance policy.
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