Whole life insurance is a blanket term covering several different policy subcategories. These subcategories all share enough characteristics to make them quite similar, but they also have substantial differences. Understanding this specific type of policy can help determine what type of plan to purchase, as well as give an insight into a potential investment for future use, or the future of loved ones.
Defining Whole Life Insurance
Most people who purchase a plan are used to a model in which expiration occurs after a certain period and coverage must be renewed. That renewal is a time to make any changes, such as increasing the amount of coverage or decreasing the life insurance rates. Whole life insurance changes that dynamic completely. Unlike other terms, it carries an expiration date beyond the years most humans are expected to live. Technically, it does not cover the complete duration of someone’s existence because it reaches maturity at some point. Typically, maturation occurs when the policy holder reaches 100 years of age.
Although it does technically expire, this type is unlikely to terminate before most beneficiaries would receive the payment from it. In the event that the policyholder was still living at 100 years of age, the contract does not need to be renegotiated. There is no discussion or debate. Instead, the death benefit is simply paid to the policyholder. The proceeds paid in the event of an expired policy are identical to the proceeds paid in the event of an actual claim. There is no functional difference. However, a claim might be called in somewhat earlier, resulting in slightly lower cash value.
The Cash Value Of A Policy
This type of policy has a special element that arises from rates paid to the insurer. As per an agreement at the beginning of the policy term, a certain portion of the paid insurance rates premium will be deposited into an account specifically belonging to that policy. The end result is an ever-increasing pool of money linked with the coverage. This pool of money acts much like a bank account, but with a guaranteed return. In the initial contract, the individual will be able to see exactly what return is expected on the investment of money. There are no surprises; the repayment rate is completely set beforehand.
This cash value can be treated like a liquid asset. Because the value is guaranteed, it is a very reliable source of funds. There are several advantages to using it as an account. First, there is no tax on interest earned; all the payments are directly deposited without any form of taxation. Secondly, the account can be accessed immediately without the worry of penalty. A policyholder cannot be penalized for borrowing from the account; the access is instant and encouraged.
Finally, some use this type of cash account to pay for retirement. They purchase whole life insurance early in life and allow the value to build up. When they reach retirement age and no longer need the protection, they can cash out the account and use it to help fund retirement.
Common Forms Of Whole Life Insurance
Although whole life insurance is considered a general type of insurance, it also has many subgroups that share characteristics with it but are not identical. First is a single premium plan, which allows an individual to be covered with just one payment. Adjustable whole life policies are a variation on the general model. On this plan, the benefits and thus monthly premiums are completely adjustable throughout the term of the policy. This provides the most flexibility of any whole life option.
Participating policies receive an additional dividend from the issuing company. This dividend is deposited into the account and is added to the accumulation. Modified and graded premium policies both offer ways to change how much premium is paid initially and scale it up later. Modified premium options have a low premium for a certain time, and then they increase suddenly. Graded premium options climb upward slowly, increasing premiums gradually. Finally, variable policies present more uncertainty about cash value because interest level on the account depends on investment choices. The policyholder must be more involved, which doesn’t suit all people.
Getting The Best Possible Rates
Coverage rates for whole life policies can be difficult to calculate. Most experts recommend working with an expert company with years of experience in the field and an established relationship with providers. Choosing a trustworthy provider is an important in securing your family’s financial future.