Definition of Whole Life Insurance
This is an introduction to whole life insurance. You will learn what it is, what it does and how to buy it. Whole life is a form of permanent insurance that can also function as an investment vehicle for saving for retirement.
Whole life came about in the late 19th century, when people were interested in a way to protect their families from the unforeseen death of breadwinners. It’s one of the oldest forms of permanent insurance and offers guaranteed coverage even if you become disabled or ill while you are still paying premiums. The name “whole life” comes from policies that typically cover your entire lifetime—although some may only last until age 100 or 120 years old.
Whole life is generally a more expensive type of insurance than term life. But because you pay only one set premium, it can be a smart option if you want to protect your family from early death or want to use the policy in a retirement savings plan.
Whole Life Insurance Definition
Whole life is an insurance product which combines several functions:
a death benefit - covering you in the event of death and usually paying off on a tax-free basis; __________________________ __________ an investment fund - where some or all of your premiums are invested to build up a cash value over time (e.g. a term life insurance policy may only pay out on the death of the insured person); __________________________ an access to retirement income - where you can withdraw your cash value as a lump sum or over a period of time in order to access your retirement funds.
Whole life insurance, commonly referred to as "whole life", is designed for the protection of those who want to cover some or all of their family's financial needs. And while whole life policies were initially designed for parents, other family members have found them useful too. With this type of policy, you can choose how much coverage you need and whether you want the money to be tax free.
In general, whole life insurance is less expensive than term life insurance. That's because most people pay a single premium for the entire period of time that they're insuring. Plus, there are no annual or lifetime limits to how much you can collect in the event of death. Life insurance companies make their money by charging you a premium that may be higher than what you actually pay out for the policy. But because you only have one payment to make over the entire period of time that you're insured, whole life can often be far less expensive than other forms of life insurance coverage.
How Whole Life Works
The basic concept behind whole life has remained unchanged throughout its history. Basically, whole life insurance is a form of permanent insurance that protects you and your family from the unexpected death of your breadwinner. It can also be an investment vehicle for retirement savings.
In whole life insurance, you pay one premium for the entire time you're insured. If you die or become disabled, the policy continues to pay out on a tax-free basis for your beneficiaries—even if they are not named in the policy. If you live long enough to qualify for a payout, it's usually paid in cash—either directly to a beneficiary or by transferring a lump sum to their account at a bank or brokerage firm.
In addition, some whole life policies offer you a cash value account. In this account, some of your premiums are deposited and invested by the insurance company. Any earnings are kept separate from the death benefit and can be accessed as needed for various reasons. These funds can be withdrawn at any time to help pay for college or other expenses without having to touch your original premium investment.
How Whole Life Insurance Works For Retirement Planning
Whole life insurance is great for retirement planning because it offers you the option of withdrawing money while you’re still alive in addition to guaranteeing that your beneficiaries will receive money in the event of your death—even if it's years down the road.
Here's how it works. Say you have $1 million in your whole life insurance policy and you’ve paid the initial premium of $100,000. You continue to pay your premiums for the next 20 years, even if you’re not making much money. In this case, about $4,000 a year is paid out on a tax-free basis to help cover the expenses of your family until you die.
The whole life insurance company now holds about $990,000 in cash value. In this case, you can draw out either the amount that is paid out to your beneficiaries—about $4,000 a year—or you can add it to your retirement funds. In this scenario, your policy continues to cover the cost of your immediate family members, including your spouse or other dependent family members.
However, in addition to providing a death benefit and cash value account for your family members—you could still use the remaining cash value of $482,000 for retirement purposes such as saving for college or starting an investment fund.
Of course, you could also just withdraw the amount that is paid out to your beneficiaries each year—in this case, $3,000 a year. This is a perfectly legal thing to do.
Where To Purchase Whole Life Insurance
The good news for many people looking for whole life insurance is that you'll have few obstacles in finding policies in your state. The U.S. Division of Fire Prevention lists each state's insurance regulators on its website, so it's easy to find the necessary contact information to apply for a policy or purchase an existing one if the policy isn't offered through your local insurance company.
If you have medical needs, you should ask your doctor to refer you for a whole life policy. Some insurers will also allow you to use your existing health insurance if you meet their criteria. In some cases, especially if your benefits are tied to your employer, the policy will be available through an employee benefit plan.
Sometimes it's a good idea to find out if your employer offers life insurance coverage as part of its workplace retirement package. There may be an additional fee involved with this option—you'll need to check with a benefits specialist for details and cost information. You can also look into the state or federal government's life insurance programs that provide low-cost coverage for retirees.
If you purchase this type of term life insurance, you'll pay a higher premium than you would with a whole life policy. But at the end of the first year, your coverage ends with no policy renewal option. And if you don't qualify for a payout, there's typically still an amount left in your cash value account that can be accessed at any time.
Whole Life Insurance Coverage Options for Individuals
Whole life policies are available in most states—check out our state-by-state buying guide for details on where each state offers these policies. You will need to inquire about the cost per-month and other terms and conditions involved before purchasing this type of coverage.
Conclusion
Whole life insurance policies offer a lot of benefits—and many downsides. But if you’re looking for life insurance that guarantees a payout no matter who survives the policyholder, look into whole life insurance. It can provide affordable protection for your loved ones in the event of your death and it can also be an investment vehicle to save for retirement.
If you have any questions about whole life insurance or are considering purchasing this type of coverage, let us know! We're always happy to help people find the best way to protect their family's future financial security.