WHAT IS WHOLE
Whole life insurance is a life insurance policy that is guaranteed to remain in force for the insured's entire lifetime, provided required premiums are paid or until the date the policy matures. As a life insurance policy, a whole life policy represents a contract between the insured and insurer in which as long as the contract terms are met, the insurer will pay the death benefit of the policy to the policy's beneficiaries when the insured dies. Because whole life policies are guaranteed to remain in force as long as the required premiums are paid, the premiums are typically much higher than those of term life insurance where the premium is fixed only for a limited term. Whole life premiums are fixed, based on the policyholder's age at the time the policy was written and typically do not increase with age. In most instances, the insured party pays premiums until death.
Premiums paid into the policy build cash value over time. That cash can be used under specific conditions in the form of a loan. Alternately, the cash can be used to pay monthly premiums. All loans must be repaid before the policyholder dies, or they will be deducted from the policy’s death benefit.
When you buy a whole life policy, you are buying both life insurance and a tax-free savings vehicle. Each year, a growing part of your premium goes into the savings vehicle. The cash balance in it grows tax-free at an interest rate guaranteed by the insurer.
Whole life insurance policies last until the policyholder's death and can accrue interest over time with a cash value component. The cash value can be used as an additional investment vehicle and can be accessed while the policyholder is alive, although penalties may be incurred.
Most whole life insurance policies are sold by mutual companies that have historically paid dividends to policyholders on top of the guarantees. The dividends increase both the cash balance and the death benefit for the policies.
Policyholders can take tax-free loans against the cash value of the policy, with the stipulation that all loans must be repaid, or the beneficiaries will receive a reduced death benefit.
WHOLE LIFE WORK?
When you buy a whole life policy, you are buying both life insurance and a tax-free savings vehicle. Each year a growing part of your premium goes into the policy's savings vehicle. The cash balance in it grows tax-free at an interest rate guaranteed by the insurer.
Most whole life insurance is sold by mutual companies. They have a long history of paying dividends to policyholders on top of the guarantees. The dividends end up increasing both your cash balance and your death benefit.
You can tap the cash value by taking loans out against that part of the policy. The loans are tax-free and don’t have to be repaid. However, they do reduce the death benefit your heirs will receive.