There are so many different types of life insurance available and sometimes it can get a little confusing to distinguish between them. Whole life insurance is one of the most popular types because it is a permanent solution to a problem we all must face at some point in our lives – the event of our death. Whole life insurance makes sure your family is secure if you should pass away, but what makes it different from the other types?
Death Benefits and Premiums
When you sign up for whole life insurance, you’ll be quoted a “face amount.” This amount is what your beneficiaries will receive if you pass away. Additionally, you can make alterations in your policy that increase this face amount such as in the event of an accidental death.
Premiums are much easier to understand with whole life insurance since they will not increase over the lifespan of the policy. The rate remains the same, making it easy for you to make payments. Whether you have a child, get married, or suffer any other health problems, your premium remains the same.
One of the biggest benefits of whole life insurance is that it increases in cash value as you pay. Some providers even allow you to borrow from your policy in some circumstances such as tuition for college or money for emergencies. Each year that you pay, the cash value of your policy grows. Plus, these funds are tax-deferred, meaning you’ll pay taxes on the money once it is withdrawn. The cash value will increase until it equals the face amount.
There are two different types of pricing methods for whole life insurance: non-participating and participating. Participating is when an insurance company shares in the excess profits along with the policyholder. The policyholder receives untaxed refunds where they have overcharged premiums.
Non-participating is when the value of the policy is determined when you first sign up and the sum charged cannot be altered once put in place. This type of whole life insurance is a higher risk for insurance companies. The reason is because businesses have to estimate how much it will cost to give you benefits and payout in the event of your death. If the amount is lower than expected, the company has to make up the difference.
The biggest question people have when it comes to whole life insurance is what will the money be used for? Most families decide to use the money received for funeral expenses, estate planning, surviving spouse/family income, or supplemental retirement income. A few other potential uses include paying off large debts or assistance in raising small children. Ultimately, what a family does with the money is up to the beneficiary.