What is Whole Life Insurance?

Whole life insurance is a type of life insurance that covers one for life. It typically requires one medical exam at the beginning of the policy. Further, as the person contributes premiums, they acquire cash value, which can be listed as assets for the purpose of purchasing a home or obtaining a loan.

There are three types of whole life insurance: single premium, traditional, and interest-sensitive. In most cases, unless one elects to change it, all forms have an unchanging premium and death benefit. Depending upon the type of whole life insurance purchased, cash value of a policy varies, but is not counted as income unless one withdraws it.

Single premium whole life insurance is the most expensive form. One pays for the entire policy in a single large payment. The cash value can increase on this type of whole life insurance, as often one receives interest on the initial investment. It is not, however, comparable to the investment interest one might receive in a more traditional IRA or 401k.

For those who want the least risk, traditional whole life insurance guarantees a specific and fixed minimum cash value for investment. This type of whole life insurance requires one to pay monthly premiums. In some cases, if one has acquired a lot of cash value and gives notice, the premiums can be paid from the acquired cash value. This is helpful if one loses a job or cannot make payments for a time for another reason. Premiums will only continue to be paid as long as there is still cash value left in the policy.

Interest-sensitive whole-life insurance has a cash value rate depending upon changing market interest rates. It is similar to loans one might hold on a house or credit card that vary their interest rates. The cash value portion of this type of whole life insurance may increase or decrease depending upon the interest rates, and it is therefore less secure than a traditional plan. If the economy is good, one is likely to see a greater return in their cash value.

In all cases, whole life insurance provides tax benefits, since cash value is not taxable until used. It is important to remember that only a portion of one’s premium converts to cash value, and this differs depending upon the plan offered. On the other hand, if one contributes to a 401k or IRA, he or she is not taxed until withdrawal, but has all the money that he or she contributed.

Most financial experts feel that whole life insurance is best for those who want absolute minimal risk and do not like the insecurity of converting assets into investments. However, experts also feel that whole life insurance may not provide enough of a return to secure comfortable retirement. Further, if premiums are not paid, the whole life insurance goes away, though one may be able to access the cash value portion.