If you’re in the market for life insurance, you’re probably familiar with the most common policies, like term life insurance and whole life insurance. You might have heard that whole life insurance is a better option, given that it provides lifetime protection. But is that really true?
Whole life is a great option for some people, but that doesn’t mean it’s the right choice for everyone. If you’re thinking about buying a whole life insurance policy, there are a few things you should know before you take the leap.
What Is Whole Life Insurance?
Whole life insurance is a type of permanent life insurance. It protects you for your entire life, from the moment your policy takes effect until you pass away. When you die, a beneficiary of your choosing receives a death benefit. That money is typically distributed tax-free and can be used for any purpose.
Over the lifetime of a whole life policy, the premiums are fixed, so your rate will never increase. However, you must continue to pay the premiums in order to keep your coverage in force. If you stop making the payments, your policy will lapse and your coverage will expire.
Another important feature of whole life insurance is cash value. Every time you make a payment, a portion of the money goes toward cash value, which acts as a savings account. You can borrow or withdraw the money while you’re still living, and use the money for anything. But if you don’t use it, the money goes back to the insurance company when you pass away.
Whole Life Insurance vs. Term Life Insurance
Unlike whole life insurance, term life insurance only stays in effect for a fixed period of time. Term lengths are usually between 10 and 30 years, but longer and shorter term lengths are available from some insurers.
Like whole life, term life insurance has fixed premiums and a guaranteed death benefit. However, your beneficiaries only receive the death benefit if you pass away during the term. If you outlive the term, your coverage ends and your beneficiaries don’t receive anything.
In addition, term life insurance does not have a cash value component. The death benefit is the only true feature of a term life policy.
In almost every situation, term life insurance is cheaper than whole life for young individuals in good health. That’s because whole life offers longer protection and the added benefit of cash value. However, term life insurance premiums increase with age, so you should consider getting coverage early to lock in a low rate.
Read more: Buying Life Insurance Young Saves Money
Pros & Cons of Whole Life Insurance
- Fixed premiums — With a whole life insurance policy, you can rest assured that the premium will remain level for your entire lifetime. Your rate won’t increase for any reason.
- Guaranteed death benefit — When you pass away, your whole life policy will pay a guaranteed death benefit. Unlike some other forms of permanent life insurance, your death benefit won’t ever decrease.
- Cash value — Whole life policies accumulate cash value. It’s money that gets put aside, and eventually, the funds can be borrowed or withdrawn while you’re still alive.
- Potential for dividends — Some whole life insurance policies pay dividends based on the insurance company’s financial performance. You can use the money to increase your cash value or to pay your premium.
- More expensive premiums — Compared to term life insurance, whole life insurance premiums are more expensive. If you’re looking for the cheapest coverage, whole life insurance may not be the best option.
- Limited cash value growth — With whole life insurance, the cash value grows at a fixed interest rate. If the rate is low, the money won’t grow significantly. On the other hand, some other types of permanent life insurance have a much bigger potential for cash value growth.
- Cash value withdrawal isn’t free — If you want to use your cash value, it could cost you. When you borrow cash value, you must pay back the money plus interest. Withdrawing the money doesn’t have this penalty, but it will reduce your death benefit by the amount you take out.
When Is Whole Life Insurance Worth It?
Whole life insurance is definitely worth it for some individuals. Specifically, whole life offers many guarantees that other policies do not. You get fixed premiums for your lifetime, a guaranteed death benefit when you pass away, and guaranteed cash value. If you’re looking for peace of mind, whole life insurance might be the right policy for you.
However, you’re going to pay extra for that peace of mind. Whole life insurance premiums are more expensive than term life premiums, so it’s only worth it if you can afford the higher rates. And even though your cash value can act as a financial emergency fund, using that money isn’t free, either.
You might also consider getting whole life insurance if you want lifetime protection. You only have to purchase one policy, and you’re set for life. Also, purchasing coverage when you’re young can help you secure a low rate that won’t change for your entire life.
When Is Whole Life Insurance Not Worth It?
Everyone has different life insurance needs and whole life insurance might not be the best option for you. For example, if you need a small amount of coverage and want the lowest premiums, you’re probably better off with term life insurance. The rates are much lower, especially when you’re young and healthy.
Read more: The Average Cost of Life Insurance by Age
You should also consider your family’s needs and your financial goals. For example, you might only want life insurance protection while your kids are young. Once the kids are out of the house and are financially independent, you might have less of a need for life insurance. In this case, a 30-year term life insurance policy might be a better (and cheaper) option.
On that note, consider where else you could potentially put your money to provide financial support for your loved ones in the event of your death. For instance, you might establish a trust for your children that would allow them to inherit your financial assets. If you want income replacement during retirement, you could also put money directly into an IRA, which could grow more quickly than the money in your cash value.
Read more: How to Open Your First IRA
Life insurance can be a valuable investment, but the best life insurance policy is different for everyone. Before you choose a policy, it’s important to do your research, compare a few options, and purchase coverage from a highly rated life insurance company.
Whole life insurance makes sense for lots of people, but that doesn’t mean it’s necessarily the right choice for you. There are lots of other options to explore, including term life insurance or universal life insurance, which might be a better fit.
As a final note, it’s also worth mentioning that you might not even need life insurance. Make sure to closely consider your family’s financial needs, your debts, and your personal goals for the future.
Life insurance can definitely be a valuable addition to your assets. On the other hand, traditional investing might yield a better outcome in the long run.
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