Whole Life Insurance - Guaranteed Rates

The premiums for a whole life policy are significantly higher than term life, and you spend the first few years paying into the policy to pay off ‘commissions’ rather than building cash value. 

While you can ‘borrow’ against your life insurance policy over the years if you need cash, during the first few years of your policy term, there isn’t likely to be much cash to borrow against.  

While whole life policies do ensure that you will have a significant policy value to leave your loved ones when you die, if you decide to cash out this policy to change your insurance coverage at any time before you die, you will pay a ‘surrender charge’. 

Therefore, you will NOT cash out the full amount of what you have paid OR the total face value of your death benefit. 

If you commit to a whole life policy, you should plan to just leave your money in this account to be used by your family after you die.

Whole life policies cover you throughout your life, not just for a term (like term insurance).

Your benefit and premium will remain the same, and your policy will build cash value, based on the percentage of your premiums invested by your insurance company. 

The cash value of your policy is tax-deferred until you withdraw money from the account, and you CAN borrow against your policy.

There are three kinds of whole life policies you can purchase:

Ø      Traditional – with guaranteed minimum rates of return on the cash value in your policy.

Ø      Interest-Sensitive – which provides a ‘variable’ rate on the cash value in your policy (like an adjustable rate mortgage) and based on the prime rate may go up or down.  <javascript>

Ø      Single Premium – which requires you to purchase a fully paid policy upfront, instead of paying premiums over a period of time.  This policy will still accrue in cash value over time and provides the same tax-deferred status.

Because a percentage of your whole life premium is invested in cash value, it is conceivable that you could pay off your policy early. 

Because your premiums are constant, it is easy to budget and predict your payments. 

Unless you make a change to your policy, you will always have the same face value coverage and death benefit without having to take physical exams or undergo medical evaluations in the future. 

You also have the benefit of tax-deferred investment. 

All in all, the whole life policy is good for someone who wants dependable coverage with predictable payment obligations and no future medical exams, although the rate of return on the invested portion of your policy is low compared to other market investments.  

Yet another myth:  Whole life or Universal life policies are always the best for everyone because you can get your money out of the policy if you need it. 

 The best policy for you is not necessarily what is best for someone else. 

Your choice will depend on your life circumstances at the time, and if you buy a certain type of policy and your circumstances change later (marriage, divorce, change of job, etc.) you can always get another type of policy later to add on to what you have. 

You may choose to buy term life insurance and take a percentage of your income and invest it every month instead of paying life insurance policy premiums. 

There are lots of options and everyone has different needs.

Remember that the type of life insurance policy you choose must be right for YOU, not for your insurance agent or your neighbor.

Often Insurance requirements will decrease as you get older.  If you lose dependents and your financial obligations are reduced, you may not need the same protection. 

If your mortgage is now paid off, you don’t need the same annual funding for your spouse and children as you might have required 15 years ago. 

Before we leave this section, there are some things you should consider when you attempt to decide which kind of policy you want to buy and how much insurance you need:

Ø      Calculate your financial obligations so you are sure to provide enough life insurance to cover your family after you die.  Be sure to include the cost of college education for your school age children. 

Ø      If there is more than one income in your household, be sure to buy policies for those members of the household that support the family and/or those who perform tasks at home for which you would have to PAY if the person died. 

In other words, if your spouse stays home and cooks and cleans and cares for the children, take into consider the cost of staffing those tasks after you spouse is gone and get life insurance for your spouse to cover those costs.

Ø      Try to anticipate cost of living increases so that your family has enough annual income to live on 10 or 15 years after you die.

Ø      Figure in the taxes your family will have to pay after they inherit the money from your estate. 

Ø      Buy mortgage insurance to pay off your mortgage in the event of your death.

Ø      Make sure any and all business obligations are covered by life insurance proceeds.

Ø      Don’t forget to figure in your funeral expenses!

Ø      Check your state and local laws to find out if your beneficiaries will have to pay estate taxes and figure those into the equation, as well.

After all of those calculations, you will probably find that you need about $800,000 to $1,000,000 in coverage to cover a young family in the event of your death. 

If you can’t afford that in a whole life policy, consider a 20 or 30-year term policy with less expensive premiums.