Life insurance is an essential financial tool that provides security and peace of mind for you and your loved ones. When exploring your options, you’ll likely come across two main types of life insurance: term life insurance and whole life insurance. In this article, we will delve into the details of whole life insurance and how it works compared to term life insurance.
Understanding Term Life Insurance
Term life insurance provides coverage for a specific period, typically 10 or 20 years. These policies do not accumulate cash value and have lower premiums due to the likelihood of the insured surviving the policy term. However, once the policy expires, you’ll need to purchase a new term and pay higher premiums if you wish to continue your life insurance coverage.
How Whole Life Insurance Works
Whole life insurance, on the other hand, is designed to provide coverage for your entire life. Unlike term life insurance, whole life policies never expire as long as you continue paying the premiums. The initial premiums are higher because of the longer policy duration. However, a portion of the premiums you pay accumulates as cash value, which you can access later in life. This type of insurance is often referred to as “permanent” insurance.
Here is an image that illustrates the main differences between the two types of policies:
Types of Whole Life Insurance
When purchasing whole life insurance, you have several types to choose from. Let’s explore the various options, their features, and benefits.
Typical Whole Life Insurance
A typical whole life insurance policy offers level premiums, meaning your premium remains the same throughout the policy’s duration. It remains in effect until you pass away, as long as you pay the premiums and accumulate cash value. The longer you have the policy, the more cash value it accumulates.
Limited Payment Whole Life Insurance
With limited payment whole life insurance, you make premium payments for a specific number of years (10, 15, or 20) and pay off the policy upfront. This eliminates the need for premium payments for the rest of your life. Instead, you pay the premiums upfront and enjoy a premium-free policy in the later years.
Single Premium Whole Life Insurance
To purchase a single premium policy, you pay a lump sum of money in exchange for a death benefit. For example, you might pay $25,000 for a $50,000 death benefit. The more you pay, the higher the death benefit.
Modified Premium Whole Life Insurance
Modified premium whole life insurance policies allow you to pay lower premiums for the first 5 to 10 years. After that, the premiums increase. This type of policy is ideal for someone who wants a high death benefit but expects to be in a better position to afford higher premiums in the future.
Joint Whole Life Insurance
Some married couples choose a joint life insurance policy called a joint survivorship policy. This type of policy ensures both spouses and does not pay the death benefit until both pass away. For parents concerned that their child with special needs may not be taken care of after they are gone, a joint survivorship policy will ensure that the child has the necessary funds. Additionally, some people use joint policies to ensure that their adult children have enough money to pay estate taxes once both parents have passed away.
Universal Life Insurance
Universal life insurance is a type of whole life insurance that offers flexible premium payments. The payments are based on the cost of insurance, which includes administrative fees, mortality charges, and other fees that keep the policy in force. The cost of insurance depends on the policyholder’s age and health. As you age, the cost of premiums increases. Any amount you pay above the cost of insurance is used to accumulate cash value in the policy. If the cash value grows enough, it can cover the increasing premiums as you get older.
Variable Universal Life Insurance
Variable universal life insurance works like universal life insurance but with one key difference. Instead of a guaranteed cash value, this type of policy uses a portion of the premium’s cash value and invests it in the market. That means the cash value can increase when the investments perform well, or decrease when they don’t.
Participating or Non-Participating
Whole life insurance policies can be participating or non-participating. If your policy is participating, it means that when the insurance company experiences a surplus of profits, they pay it to the policyholders in the form of “dividends.” These dividends are not taxed by the IRS because they are seen as an overpayment on the insurance policy. If a whole life policy does not pay dividends, it is considered a non-participating policy.
Final Expense Insurance
One of the most popular types of whole life insurance is called final expense insurance. Commonly known as burial insurance or funeral insurance, final expense plans are specifically designed to help cover end-of-life expenses such as medical bills and burial costs.
Final expense policies typically have smaller face amounts, usually less than $20,000, as they are intended to cover specific expenses for surviving loved ones. These plans can be more affordable and easier to qualify for than traditional life insurance because the face amount is relatively small.
Funeral Advantage® is a final expense insurance program specifically designed to help cover end-of-life expenses such as medical bills and funeral costs. Like everything today, funeral costs are continually increasing. The average funeral can cost up to $9,000, depending on the services used. Coffins alone can cost thousands of dollars, depending on the materials used.
Most families are not financially prepared to cover the high cost of their loved one’s final arrangements. That’s where Funeral Advantage comes in. It provides a cash benefit from life insurance when your family needs it the most. Most of our policies range from $10,000 to $15,000, making them ideal for fixed-income families concerned about paying for their loved ones’ final arrangements. With Funeral Advantage, you don’t need to undergo a medical exam to qualify like most insurance policies. All you have to do is answer a few health questions on a one-page application.
With each Funeral Advantage policy, a free membership to the Funeral Consumer Guardian Society® (FCGS) is included. The FCGS will assist your surviving loved ones with the many details that arise immediately after your passing. They will help pay for funeral costs to protect your family from excessive expenses.
In conclusion, whole life insurance offers lifelong coverage and the potential to accumulate cash value. With various types of whole life insurance available, you can choose a policy that suits your needs and financial goals. Whether you’re looking for financial protection for your family or a way to cover final expenses, whole life insurance provides a valuable solution.