How Does Whole Life Insurance Work?
Whole life insurance is a form of permanent life insurance protection. These policies offer a fixed premium to the policyholder that will not increase over time, along with a guaranteed amount of death benefit. In addition, these types of policies offer a cash value feature that is typically guaranteed to grow each year.
During the early years of a whole life insurance policy, the premiums may be higher than those of term insurance. However, the cash value build up that is contained within a whole life plan can grow significantly over time, and can be accessed by the policy holder through cash surrenders or policy loans.
This cash accumulates on a tax-deferred basis, allowing the policyholder to potentially grow their funds faster than they can in other savings types of vehicles that are taxed on their growth each year.
The premiums that are paid for whole life insurance are based on several factors, including the insured’s current age, health status, and amount of the death benefit desired. They are also determined based on the amount that is paid for the pure death benefit protection in combination with the amount that will be placed in the cash value component of the policy.
The Many Benefits
Unlike term life insurance policies, whole life insurance can provide the policyholder with a guaranteed amount of death benefit with a premium that will never change. In addition to a set amount of protection and a level premium, whole life can also offer policyholders:
- Tax deferred growth on cash value earnings
- Death benefit that is income tax free to beneficiaries
- Tax free cash for surrender or loans
- The option to take additional cash in the form of dividends
- Living Benefits – which is the ability to use some or all of the death benefit proceeds for needs during life such as long term care, disability, or other chronic illness expenses
- The potential to add additional coverage at a later time
- The ability of business owners or partners to use funds for finding a replacement for the loss of a key individual or executive