What is whole life insurance?

Although whole life insurance is used synonymously with permanent life insurance, whole life is actually a type of permanent life insurance.

There are two types of life insurance: permanent life and term life. Unlike term life insurance, which only lasts for a specific timeframe, permanent life insurance never expires.

Also, permanent life insurance has a cash value component in addition to the death benefit. You can take a loan on the cash value or use it as collateral during your lifetime, with tax deferred. This is why permanent life insurance is considerably more expensive than term life insurance.

What is whole life insurance?
Whole life is a type of permanent life insurance. Permanent life insurance lasts until you die, or an average of 110 years, which is why it’s more expensive in the early years of policy, but the older you get it becomes less expensive, according to Mark Williams, CEO of Brokers International.

Williams said that “in the early years of overpayment, the cash value put inside the policy earns interest and you use that bucket of money to offset the cost of insurance when you’re older.”

You can also use the cash value of permanent life insurance during your lifetime, for things such as paying your children’s college tuition, funding a business, or purchasing a second home. Most people use the cash value to fund their retirement — paying themselves a monthly income when they stop working. Due to these features, permanent life insurance can function as an investment and wealth-building tool.

There are different types of permanent life insurance, but they all have death benefits as well as a cash value that grows on a tax-deferred basis. The big difference between the types of permanent life insurance policies is how they manage the cash value.

  
Whole life stands out from other types of permanent life insurance because it guarantees the exact same payment for the life of the policy.

The insurance company invests your money (premium) with its own portfolio. The attraction is that your payment stays the same for the life of the policy. Many whole life insurance companies also let you increase the death benefit over time.

You can add riders to your whole life insurance policy
All types of permanent life insurance, including whole life, offer riders that can be added to the policy. This can’t be done with term life insurance policies.

Some riders include: waiver of premium if you are sick, hurt, or disabled; long-term care for assisted living, in-home or nursing facility; and a family rider which puts the entire family under one policy.

Every rider is an additional cost that increases the premium on your policy, but it’s better than having multiple policies. Williams noted that riders vary depending on the insurance company, and that you must buy riders up front.

How much does whole life insurance cost?
Permanent life insurance is considerably more expensive than term life insurance because of the cash value aspect of this kind of policy, and because the policy never expires.

The average person may not be able to afford a $1 million universal life insurance policy. Think of permanent life insurance coverage like equity in a home. You may not be able to get your dream home right off the bat, but you can get a starter home that also builds you wealth. With permanent life insurance, start with a smaller death benefit and increase it over time. And if you can’t afford a permanent life insurance policy, get a term life policy that can be converted to a permanent policy.

Williams suggests a combination of permanent and term life insurance. For example, if you have $200,000 in permanent life and $300,000 in term for 20 years, at the end of 20 years the term life insurance policy goes away but you still have your $200,000 permanent policy that has earned cash value.

However, you should only purchase what you can afford. It’s important to talk to a financial advisor about your financial situation and goals to determine what life insurance is best for you.