Generally, people are aware of the importance of having life insurance. In fact, about 93% of Americans who own one are confident why it is important to their lives. They know the basic information and how insurance works. But according to the national study done by LearnVest and Guardian, only 70% of the beneficiaries are convinced that their insurance company will pay out should the need arises. In addition, only 34% of the respondents know how to collect the payout. In short, only a small percentage of people understand the real meaning of whole life insurance definition.
Whole Life Insurance Definition
Whole life insurance is the most important policy that people should know about. It’s a type of life insurance contract that provides protection for the insured person in his lifetime. If the contract holder died, the payout is paid to the policy holder’s beneficiaries – spouse, children, etc.
Aside from this whole life insurance definition, this type of coverage also consists of investment component, which means there’s a cash value accumulated while paying the premiums. The cash value is tax-free and can be withdrawn or borrowed by the policy holder.
Benefits of Whole Life Insurance
- Unlike other insurance policy, such as term insurance, the cost of premiums paid for whole life never increases. In term life policies, your payments increase over time. This is due to the changes in your age and health. Definitely as you grow older, your assurance risk becomes higher. But in whole life insurance, even if you become terminally ill, your premiums don’t change.
- Since the premium for whole life doesn’t change, your policy gets significantly cheaper as time passes by. This is due to inflation, which reduces the value of money. This means you’re paying for lower premiums, while obtaining the maximum insurance benefits.
- In whole life, the amount you pay for the premiums accumulates as cash value. Similar to other investments, that cash value earns interest. And you can increase that amount if you’re willing to pay for more premiums.
- Since the cash value is owned by the policy holder, you have the option to borrow that money if ever you are in need of cash. However, you need to pay the interest to the insurance company when you borrow from the cash value of the policy. The interest of the loan is, however, flexible and lower compared when you take loans from banks and financing companies.
- In whole life insurance, the insurance company pays a portion of its earnings, known as a dividend. The best thing here is that amount is given without taxation. For instance, your insurance company pays out an amount of $500 in dividends on your policy, you don’t pay any tax on the amount. You can then use those dollars to reinvest to other insurance policies, which accumulates more benefit and interest.
Disadvantages of Whole Life Insurance
While there are many advantages in purchasing whole life insurance, there are also some negative aspects associated with it:
- Premiums for whole life insurance are much more expensive than other insurance policy.
- The policies included in whole life are much more complicated and harder to comprehend.
- There is a “surrender period” – the amount of time you need to keep your money to the insurance company before you can withdraw it. If you take it before the surrender period, you will be charged with certain “surrender amount.”
- Most whole life insurance policies have minimum cash balance (usually at $10,000) that you must meet before you can borrow some cash.
The key when deciding to apply for insurance is to know your needs.
If you have a family to support and don’t know if what type of insurance you should take, then the best thing is to apply for whole life insurance. With whole life insurance, you’re not just giving yourself protection, but you’re providing your family some stability as well. Consult a financial professional and get different quotes from life insurance companies. It’s very important that you know and understand the whole life insurance definition first before you make a final decision.