How does Whole Life Insurance work?

a couple buying whole life insurance

Life insurance can be an unsettling topic. It’s a complex subject, with several options. On top of that, most folks feel uncomfortable planning for their death. Furthermore, most people recognize the value of life insurance but many are unsure about what kind of policy is best. Whole Life Insurance is one of the three main types of policies available for coverage today.

More detail on Whole Life Insurance

Whole life insurance is permanent coverage intended to last for the insured’s “whole life”. This is a contract in which the insurance company promises to pay your beneficiary an agreed upon sum of money (death benefit) when you pass.

The premium payments will stay level (never increase) for the life of the policy. Whole Life Insurance payments will be higher than a term life policy because the policy lasts for your entire lifetime. Through time, the premium payments start to build up a cash value. Another benefit of whole life insurance is the possibility to receive dividends in some instances.

The owner of the policy can borrow from the cash value if needed. All loans must be repaid before the insured passes or they will be deducted from the death benefit leaving the beneficiary with the difference. Loans are also charged interest by the insurance company.

A major advantage of this type of insurance is that the insured cannot outlive the policy. Beneficiaries are always protected.  As a result, whole life insurance is often used for generational trusts, estate planning and for final expenses.

Term Life or Whole Life Insurance?

Two of the most common types are:

  • Whole life insurance: This is insurance that lasts for a person’s whole life. Whole life insurance is often referred to as ‘permanent’ life insurance. Insurance premiums are fixed, based on the age at issue and do not increase with age. Premiums are higher than term insurance because of the length of the policy. Also, a portion of the payments build into a cash value, making this type of policy an asset.
  • Term life insurance: This is insurance that covers a specific term of time, such as 10, 20 or 30 years. This is ‘just in case’ insurance best suited for folks less than 50 years of age with sizable financial responsibilities. Premium payments can be lower because most people will outlive their policy. At the end of the term, (policy expires) a person must buy another policy and now pay much higher payments since they are older. These policies do not accumulate a cash value.  

Final Expense Insurance is Whole Life Insurance

A popular kind of whole life insurance for folks over 45 is called final expense insurance. More commonly known as funeral insurance or burial insurance. Final expense insurance is specifically designed to help cover end of life expenses like funeral costs and medical bills. However, it can also be used to leave something extra to family or for a donation to charity or for a gift to a person’s church or religious organization.

Final expense policies typically have small face amounts, usually under $25,000; because they usually cover specific expenses like funeral costs for surviving family members and loved ones. Final expense plans are easier to qualify for than traditional whole life insurance because of the smaller face amounts. This is the ‘when’ insurance for when a person passes, meaning this policy is something a person can count on being there for their family.

Final Thoughts

Every family has different thoughts and concerns about which kind of life insurance is best. A few questions to ask that can narrow a person’s search-

  • What do I want my policy to accomplish?
  • How much coverage is needed?
  • Do I want a temporary or permanent policy?
  • Is a fixed premium payment important to me?
  • Is building cash value important?

In conclusion, whichever life insurance option you choose, it is critically important to discern the unique guidelines for each type.

Here at Life Choice Advisors, we recommend doing as much research as needed to feel comfortable. We also offer a no obligation ‘needs assessment’ with one of our brokers to assist families with their options. Contact us today, we’ll take the time to assess your situation and help you protect your loved ones.