Whole life insurance is one of the most popular forms today, partly because it’s the traditional version. But there’s one primary reason it hasn’t been replaced by term life insurance – a cheaper, more modern form of life insurance. It’s because whole life insurance investment is low-risk and profitable in the long term.
Interested in this prospect already? Let’s talk about whole life insurance, its benefits, and its disadvantages. So without further ado, let’s dive in.
Whole life insurance is a good investment because it covers the insured for their lifetime and provides a reasonable ROI in the long term. Nonetheless, it is more expensive than term life insurance and attracts a high-interest rate on loans.
What is Whole life Insurance?
Whole life insurance is a type of permanent life insurance that provides a predetermined financial benefit upon the insured’s death. Unlike term life insurance, whole life insurance lasts for the entire period the insured is alive. Because of this feature, it’s also known as full life insurance.
There are three essential terms to note when exploring the subject of whole life insurance. These terms are premiums, death benefit, and cash value. It’s essential to fully appreciate these terms because they’re critical to understanding what whole life insurance investment entails.
Premiums are regular dues the insured pays to the insurance company during their lifetime. These regular payments, usually monthly, eventually accrue into the death benefit. One distinguishing feature of whole life insurance is that its premiums are high – they can range from hundreds to thousands of dollars monthly.
The death benefit is a predetermined sum that the insurer will pay the insured’s family upon death. The insurer’s insurance policy clearly stipulates this amount, which also determines the premium.
On the other hand, the cash value is the real-time value of the cash that accumulates over time from premium payments. This amount remains after commission fees are paid to insurance agents, and the insurer’s administrative fees have been deducted from premiums. These deductions usually happen in the early years of the payment and decline over time.
Types of Whole life Insurance Investment
Whole life insurance can be classified into two categories depending on the risk allocation and premium recurrence.
Based on risk allocation, whole life insurance is divided into participating and non-participating life insurance policies.
● Participating Life Insurance Policies
A participating policy is an insurance contract that pays the insured dividends from interest on the cash value of their insurance. This kind of policy ensures that the insurance company’s annual profits from the cash value are shared with the insured. As a participant in these dividends, you can use them in various ways.
Firstly, you can use the dividend cash to pay regular insurance premiums or add it to the insurance to increase the value of your insurance. Alternatively, you can withdraw the dividends in cash and use them for other purposes. One important thing to note is that participating policies often attract higher premiums since they’re interest-based.
● Non-participating Life Insurance Policies
Non-participating life insurance policies are less expensive when compared to participating life policies. This type of insurance policy doesn’t involve sharing any dividends and is risk-free.
As aforementioned, premium pricing also determines the kind of whole life insurance investment a person enjoys. This category has three types: single payment premium, modified premium, and limited premium.
● Single Payment Premiums
A single-payment premium is an insurance policy that involves the insured paying a lump sum as a premium rather than recurrent payments. The cash value of this policy attracts guaranteed interest annually, which can be withdrawn or borrowed against. This feature makes single-payment premium policies the preferred form of whole life insurance investment.
● Limited Payment Premiums
Limited payment is usually the best option for regular whole life insurance premiums. Limited payment policies involve the insured paying high amounts as premiums that wane as the insured gets older. This kind of policy runs for a specific period and is specifically designed for people that want life insurance but don’t want to pay premiums when they grow old.
The cash value of this kind of policy also attracts interest, albeit at lower rates. Nonetheless, it still provides death benefits for the insured.
● Modified Premium
Modified premiums involve the insured paying lower amounts of premium for a specified period during the policy. After this period, the premium amounts will increase to a certain amount until the end of the contract. Like limited payment premiums, this kind of insurance’s cash value attracts lower interest rates than single payment premiums.
Is Whole life Insurance a Good Investment?
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As a low-risk investment, whole life insurance is a good investment. Whole life insurance investment are reasonable because its cash value attracts withdrawable interest when the insured still lives. Furthermore, it guarantees death benefits when you pass away, a win-win situation.
Single-payment premium policies attract the highest interest rates than other kinds of whole life insurance policies. Moreover, whole life insurance investment is considerably safer than other kinds of insurance. But they attract lower interest compared to other investments with attached risks.
Benefits of Whole life Insurance
1. Lifetime protection:
Whole life insurance investment provides a guaranteed death benefit that’s withdrawable upon the insured’s death. Unlike term insurance, it covers the insured throughout their lifetime and not just for a limited period.
2. Withdrawable cash value:
A percentage of the cash value of whole life insurance investment can be borrowed against during emergencies during the insured’s lifetime. Furthermore, this cash value attracts interest and, for participating policies, annual dividends.
A whole life insurance contract offers several premium payment options. They can be tailored to suit your income flow while providing permanent life coverage. You can also choose to spend the dividends from interest gained on the cash value on various things.
4. Low-risk investment:
Whole life insurance investment is low-risk and provide guaranteed investable dividends over time. Because of the duality of its benefits – a death benefit and a withdrawable cash value – whole life insurance is prevalent.
Cons of Whole life Insurance Investment
1. Expensive premiums:
A whole life insurance investment is relatively costly compared to term life insurance. On average, premiums for term life insurance cost just a few dollars. On the other hand, whole life insurance insurance can cost up to a hundred dollars or more depending on the death benefit value.
Sometimes, these premiums are paid for an entire lifetime rather than a limited period. This can be overwhelming for some people. Luckily, you can modify payment plans.
2. Higher loan interest values:
Loans borrowed against the cash value of whole life insurance policies usually have interest rates attached to them. Depending on the insurer, these rates can be higher than traditional loans.
While whole life insurance is a relatively expensive insurance investment, it provides considerably better ROIs and life insurance coverage. So if you look towards leaving a hefty inheritance for your heir on your passing, you should consider getting one.
Nonetheless, ensure you fully understand your insurer’s policy and choose an appropriate premium payment plan before signing the contract. If you’ve been thinking about purchasing whole life insurance, talk to a professional team of experts to help you get started with the best investment options today.
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