Whole Life Insurance

What it is. How it works.

Whole life is a type of permanent life insurance. It’s called permanent because a whole life policy provides life-long protection and is guaranteed to do so by the insurance company. With whole life, you pay a fixed premium for life instead of the increasing premiums found on renewable term life insurance policies. Since the word “term” in term life insurance means a period of time one could say that the term for whole life insurance is the term of all of your life. It is not technically called lifetime term insurance, but in a way it could be described that way.

How long does it last and should you get this kind of insurance?

With whole life insurance policies, as long as you pay the premiums, the death benefit will be paid. These policies are designed and priced for you to keep over a long period of time. It’s important to remember that if you’re not sure that you’re going to keep this kind of insurance policy then it’s probably the wrong type of insurance for you. In that case, you should look at term life insurance. The biggest difference between whole life insurance policy and the different types of term policies is that whole life insures something that will unfortunately happen for certain; one’s death. Term insures the possibility of you dying during the term period, whether that is 1 year or up to 30 years depending on the type of term insurance you get.

Whole life also has a cash component. This cash value can grow and interest is credited to the cash value. Interest growth in these policies is tax-deferred. You don’t pay taxes on the growth. If you die, your beneficiary also does not pay income taxes on the benefit received. If you cash in the policy and you receive back more than you put in, you pay income taxes only on the amount above what you put in.

There are differences among these policies. Some of these policies are from mutual life insurance companies which mean that the insurance company is owned by the policyholders. Mutual company policies can pay dividends to the policyholders which can both enhance cash values and increase the insurance amount.                              

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