What Is Whole Life Insurance — And Do You Need It?
Types of life insurance fall into two broad categories: term life insurance and whole life insurance. Our last article examined term life insurance, and this article will take a closer look at whole life insurance.
Protection and Cash Value
Whole life is a kind of life insurance that combines financial protection for loved ones in the event of a family member’s death with a cash value account. A portion of the premium paid goes into what is essentially a guaranteed cash value account*, while the remaining amount goes toward the insurance component. This component will pay a death benefit to beneficiaries when the insured dies, assuming all the premiums have been paid and the terms of the insurance contract have been met.
Whole life insurance offers guaranteed policy cash values* and the potential for additional cash value funded with policy dividends, which are not guaranteed. Policyholders can withdraw this cash value, borrow against it or use it to buy more life insurance coverage, which is referred to as buying “paid-up additions.”
"One of the potential benefits of whole life insurance is that, unlike term insurance, the premium amount remains the same throughout the insured’s life, with no future health exams required," says Martin Walcoe, EVP of David Lerner Associates Inc."This is why it is sometimes called permanent insurance—policyholders may be able to permanently lock in coverage at a fixed price for the rest of their lives."
Which Is Best?
Due primarily to the cash value and permanent premium, whole life insurance is usually more expensive than term life insurance—potentially much more expensive. Therefore, determining which type of insurance might be best for your particular situation usually involves answering a few questions, such as:
• How much can you afford to pay in premiums?For many people, whole life insurance is cost-prohibitive. These people may need to choose term insurance simply because they cannot afford whole life. Another option is to mix and match whole and term insurance to arrive at an affordable premium that can still give you the benefits of both policies.
• How important is it that you have affordable life insurance coverage for the rest of your life?Not everyone needs lifelong coverage. For example, some people feel that they only need to lock in coverage until their children have graduated college. For them, a term insurance policy might be more appropriate.
• Do you have other types of investment and/or savings accounts?If you have bank or money market savings accounts or retirement accounts like an IRA or 401(k), you might not need the cash value of a whole life insurance policy.
• What is the state of your health?If you are unsure about the state of your future health, the guaranteed level premium feature with no future health exams of a whole life policy might be an important benefit for you.
*Not a bank or credit union deposit. Not FDIC insured. Not insured by any federal agency. Guarantee is based on the insurance company’s ability to pay.
Material contained in this article is provided for information purposes only and is not intended to be used in connection with the evaluation of any investments offered by David Lerner Associates,Inc. (DLA). This material does not constitute an offer or recommendation to buy or sell securities and should not be considering in connection with the purchase or sale of securities. Member FINRA & SIPC.