What is life insurance?
A whole life insurance policy is a contract with the insurance company. Typically people buy life insurance to provide a financial safety net for their dependents later to take care of them. When guardians are not around, the family can make use to cover the costs of a funeral, mortgage, education & other expenses. there are many variations of whole life insurance such as burial insurance for seniors and final expense life insurance or funeral coverage for parents.
Normally, life insurance is chosen according to the goals and needs of the owner. It is basically a legal binding contract while depending on the contract, many events like terminal or critical illness can also trigger payment. The premium is paid by the policyholder either on a regular or lump sum basis.
Though life policies are legal contracts and certain contract terms, they have limitations of events. The contract writes various exclusions that limit insurer’s liability like suicide-related claims, fraud, war, and civil commotion. At present, life insurance is somewhat similar to the asset management industry.
Buying life insurance
Life insurance provides financial support to the surviving dependents or in some cases, other beneficiaries after the insured dies. It basically depends on people who may require life insurance after careful analysis of their financial situation and living standard. People who opt for life insurance are:
Mostly parents with minor children
Parents that have children with special needs
Adults who share a property
Families who are not able to afford funeral and burial expenses
Businesses with key employees
Pensioners who are married
Types of Life insurance
Life insurance is of various types that are available to meet all sorts of needs and preferences of the people who are to benefit from it. Its various types are the term life, level term, increasing term, permanent, single premium, whole life, universal life, variable universal and indexed universal, etc.
Out of the above-mentioned types of life insurance, the more common types of life insurance are term life insurance, universal life insurance, and whole life insurance. The insurers obviously evaluate the applicants on case to case basis, and almost everyone can find a policy that may meet their needs.
Term life insurance
This life insurance is designed to provide financial protection for a specific period of time which varies accordingly. In the case of the traditional term insurance, the premium amount is the same for the selected coverage time.
The policies may offer continued coverage after that time; normally, the premium rate gets substantially higher. As evident from its name, the term life insurance is mostly less expensive as compared to permanent life insurance.
Universal life insurance
Universal life insurance is permanent life insurance that is designed to provide coverage for the lifetime. In comparison with whole life insurance, it has flexible policies and allows raising or lowering the premium payment or the amount of coverage throughout the lifetime.
Whole Life Insurance
Like universal life insurance, whole life insurance also provides lifetime coverage. It is a type of cash value life insurance policy that provides lifetime protection. Because of the lifetime coverage period, its premium payments are also higher as compared to the term life insurance. Its key benefits are:
The death benefit is to be paid to the beneficiary after the policy holder’s death.
The cash value is accumulated over the insurance term that can be used for savings or borrowing if the money is required when the policyholder is alive.
The whole life insurance covers for the entire life and not just a specific period like the term life insurance. Its policies apply to the premiums that are paid in both investments or savings and death benefits. It can be used as an estate planning tool for wealth preservation to beneficiaries.
Types of whole life insurance
Although the whole life insurance is somewhat more complicated than the term life insurance, yet it is a straightforward form of permanent life insurance. It can be further sub-divided into three types depending upon the requirement of the policyholder.
Traditional whole life insurance
As explained by its name, the traditional whole life insurance offers a minimum rate of return that is guaranteed on the cash value proportion. It basically never runs out, unlike the term life insurance which covers the contract holder until an age limit that is specified.
Interest sensitive whole life insurance
This type of whole life insurance offers a variable rate on the cash value proportion, which quite resembles the adjustable-rate mortgage. The policyholder can have more flexibility, such as increased death benefit without raising premiums depending upon the economy and rate of return.
Single premium whole life insurance
The single premium is specifically made for those who have a large amount of money, and they would like to purchase an upfront policy. The single premium whole life insurance accrues cash value, while on returns it has the same tax shelter.
The 7 Lies
The first question that may trigger in mind can be “is whole life insurance worth it?” Many people generally consider whole life insurance a bad investment unless one requires permanent life insurance coverage. For lifelong coverage, it obviously is a worthwhile investment. Is burial insurance worth it?
Some people think that the whole life insurance is quite expensive and usually might take over a decade to give some reasonable investment returns. Therefore, most people who don’t have proper awareness do not opt for it. A few misconceptions regarding whole life insurance are as follows:
Low rates of return
There are detractors that actually pull one aspect of whole life insurance out of the entire package, and when they compare it to others that do much less. There is actually a myth that whole life returns hardly 3-4% while other investments have a 7-12% rate of return.
Even if this statement is true, yet the whole life insurance return is guaranteed against loss. It has tax benefits, state benefits, loan provisions, and most importantly, protection for income. This is a point to be considered as many people ignore it.
It is a known fact that whole life insurance has a guaranteed return rate. If the dividends are added, the return rate climbs to much higher. Secondly, whole life insurance from mutual insurance earns tax-free income dividends, and cash value can be borrowed against it and used.
On the other hand, the other traditional investment is subject to taxes and market loss.
Also, the long time averages are not helpful during the time of retirement. Most people with a limited approach might opt for the traditional investment type and may face the consequences.
Many people think term insurance is better.
The majority of experts and advisors on insurance consider the term insurance a far better option than the whole life insurance. Even if one Google the comparison between the two, term insurance is certainly given the edge.
The first thing people have to keep in mind is that term insurance and whole life insurance are actually two separate products. As these serve two different purposes, therefore, the comparison doesn’t make any sense. Thus, one should not consider these as the same product.
The term insurance no doubt gives a great coverage at an affordable price, but as it is limited for a certain amount of time, therefore, it expires. If people are to buy an insurance policy, it is not at all a bad option to consider both as both serve in separate but useful ways.
Insurance is not an investment.
The whole life insurance must be treated as various other types of life insurance. The intention is to get the highest benefits for the lowest possible price. The answer is simple and is always a fixed term policy. A few circumstances actually make the whole life insurance appropriate.
The whole life allows the policyholder to accumulate wealth and use these savings within the course of their life. So if one considers investments, they might not necessarily find the whole life insurance as the best choice.
Depending on the personal situation and the performance of the market, the people could consider purchasing life insurance that has a longer span. The fixed annual rate for such kinds of people seems a better choice.
If the policyholder considers working with an investment advisor to figure out the best strategy for how to invest their money or savings, it would certainly be beneficial. It is quite better to shop around to find alternative quotes rather than dealing with an agent who offers one option.
A broker might be able to offer several quotes with various options for the whole life insurance. On the other hand, financial advisors can view the aspects of the financial plan. There are various life insurance policies to choose from, and one can get quotes from several agents.
Whole life insurance only offers a permanent death benefit
Many people argue that there are many types of insurance that provide permanent death benefit at a lower cost, such as universal life insurance. This policy is cheaper, it provides a death benefit, but its cash value is worthless.
Nowadays, there is a cash value growth option available for the whole life policyholder. The detractors, on the other hand, will pick some guaranteed whole life illustration and use an argument of inflation or agent commissions in order to discuss cash value potential growth.
In reality, there are various ways to get benefited from cash value life insurance policy. In this matter inflation is just one of the factors that are involved. Thus, not only the cash grows each year, but the death benefit also increases. In case of death, the family will get a higher death benefit.
Considering whole life as a horrible way to save on taxes
There are a lot of people around who argue that the taxes will not be higher in the future, or in other words they might not fall in a higher tax bracket. There are still people who have a firm belief that their tax situation will be better in the upcoming future.
One has to look at the fact that the whole life insurance policy allows withdrawing from cash value without tax and free of interest. It is somewhat true that interest is charged on policy loans on cash value; therefore, in most cases, it is equivalent to being interest and tax-free.
Whole life insurance might not be the greatest way to take advantage of the tax system, but there are many people around who want to keep things simple. This is why the cash value life insurance provides a tremendous benefit and a lot more that certainly values a lot.
Cash value growth takes a long time.
There is no doubt that cash value is the crucial selling point of the whole life insurance. It is basically an account of the policyholder that actually builds up over time and is tax-deferred. The premium fuels a portion, and the interest is also paid by the insurance company.
There is no doubt that the whole life policy builds up cash very slow at the start. It actually takes several years to pick up the pace when the earnings start growing faster than the mortality cost. The cash value may earn enough that start paying premiums until the death of the policyholder.
The whole life insurance contract is designed to take advantage of the money after death so that the beneficiaries could receive the death benefit and not the cash value that has accumulated over a long period of time.
Whole life insurance is not needed for older people
There are a lot of people who think that they will not require life insurance when they get old. There is no doubt that the significance of life insurance is more when there are dependents, especially children.
People need to consider that when the children are grownups and couples will depend on each other’s income to protect themselves. They will require pension, social security, and annuity income from each other. So no matter what its purpose is such as a seniors burial insurance. Nowadays, nobody saves enough money so that he/she can get self-insured in the future. This is a fact that most of the older people need to self-insure because at some point of age, the cost of insurance is prohibitive or when people are unhealthy.
Hi, I’m Mitch Winstead, from Advanced Mutual Group. If you have any questions about this article or would like a free quote with no obligations, please call our office today toll-free 1-866-598-8170. Or email us at firstname.lastname@example.org
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