Whole life insurance is coverage for a lifetime unlike specified periods as in term insurance. Both death benefit and premium will usually stay the same. With whole life insurance, cash value is built as a return on a part of your insurance premiums that the insurance company invests. Your cash value is tax-deferred till withdrawal and you can also use it for borrowing.
Are there choices within whole life insurance?
Definitely, with the most popular being traditional, interest-sensitive and single premium whole life insurance. With traditional, you get a guarantee of minimum rate of return on your cash value portion. Interest-sensitive is a more variable rate on your cash value, much like an adjustable mortgage rate.
Interest-sensitive whole life insurance offers more flexibility on your insurance policy as in improving death benefit without altering your insurance premiums depending on the economy and the rate of return on your cash value portion. Single-premium whole life insurance is meant for those with large sums of money, wishing to purchase an insurance policy up front. Like other whole life insurance options, single premium whole life insurance accumulates cash value with the same tax shelter on returns.
Here are the types of whole life insurance.
Traditional Whole Life Insurance
Simply put it is a policy that accumulates cash value, the premium is payable for the lifetime of the insured, with premiums guaranteed not to increase and the face or coverage amount will not decrease. Otherwise, level insurance and level premiums payable for the lifetime of the insured.
Whole Life insurance is also known as “ straight life and permanent life insurance” and does accumulate cash value that can be borrowed on, however it is not a savings account or investment.
If you buy your policy from a stock company or non-participating company you have a guaranteed rate of interest on the cash value accumulation. It is very minimum, however, if you buy your policy from a mutual or participating company they will have a guaranteed interest rate plus any declared dividends for the year, but the dividends are not guaranteed. Also, your coverage will cost you more from a participating company.
Single Premium Whole Life
The main benefit of life insurance is to create an estate that can provide for survivors or leave something to charity. Single-premium life (SPL) is a type of insurance in which a lump sum of money is paid into the policy in return for a death benefit that is guaranteed until you die. Here we look at some of the different versions of SPL available, offering a wide range of investment options and withdrawal provisions.
The cash value builds up quickly because the policy is fully funded. The size of the death benefit depends on the amount of the SPL premium and the age and health of the insured.
There are a number of SPL options, so you should consider your risk tolerance, any possible change in your financial situation. The minimum death benefit is established when you purchase the policy, but if the policy’s account value grows beyond a certain amount, then the death benefit can go up as well.
Life Paid Up At 65—-Level premiums payable until the policy anniversary immediately following the Insured’s 65th birthday. The policy remains in force after it becomes fully paid up at the attained age 65.
Simplified Issue Whole Life
This type of policy will primarily be used for burial or final expense plans. Usually when you apply for life insurance, you go through a paramedical exam as part of the underwriting process. This is when the insurer digs into your health and finds out how risky you are to insure. Ultimately, it helps them set your premium rate (and puts you in line for the best possible rates since the insurer has more information about you).
You don’t need to go through the medical exam, but you do need to fill out a health questionnaire, answering questions like if you smoke, have been diagnosed with serious illnesses, and so on.
People in poor health may have to take the exam if they have too many health issues, and they could flat-out be denied by insurers. For those healthier people in a hurry, though, it might be a good option to skip scheduling the paramedical exam, which adds some time to the underwriting process.
With simplified issue life insurance, though, you don’t have to go through that. That’s the “simplified” part of this policy type: known as a “no exam policy,” a simplified issue policy will get you life insurance without the health exam.
Modified Whole Life—-Modified Whole Life Insurance entails a lowered amount of premium due in the earlier years of one’s contract. This can last for as long as 5-10 years depending on the agreement. In traditional insurance plans, the premium amount remains flat from start to conclusion.
In general, the insurance coverage is designed to have an increasing premium near the backend of its duration. Most agreements will see the premium rise only once after the first 5-10 years. This coverage plan acts as a win-win situation for both parties as the risk is limited during the earlier years of one’s agreement.
While the premium will start low, this does not impact the face amount. In general, the difference is only going to be seen with the premium amount and its fluctuation at various stages. The face amount or coverage amount will be the same from start to finish.
The face amount or coverage amount will not change at any point.
If at some point you decide you wanted to cancel your modified whole life insurance policy, you will receive the accumulated cash value or may receive one of two options which include a reduced paid-up coverage or an extended term insurance policy.
Guaranteed Issue Whole Life
Guaranteed issue life insurance takes the concept of simplified issue life insurance – forgoing the health exam – and takes it a step further in that you don’t have to answer any questions about your health, either. As long as you can pay the premium, the insurer will cover you, needing only your age, sex, and state of residence. That makes it appealing for older people, whose declining health makes it prohibitively expensive to get coverage with another insurance type.
Guaranteed issue life insurance is useful for elderly applicants, but others can likely get more life insurance coverage at a lower cost with a different policy type. Just like with simplified issue life insurance, the lack of insight into your health conditions that a medical exam and interview would provide means that you’re going to be paying more for coverage.
Graded Benefit Whole Life—-However, the “graded” part of the policy is what you need to understand. It is true that the premiums will not increase, but the policy pays your beneficiary only your premiums paid, plus interest if you die within the first two years after purchasing your policy.
Interest rates range from seven to 10 percent, although a few companies may offer up to 10 percent the first year and 20 percent the second year. If you die within the third year or later, your beneficiary receives the full face value of the policy. If the policyholder has an accidental death, the beneficiary receives the full face value immediately.
This type of policy should only be considered as the last resort, premiums are high, death beneft is payable only after the insured has lived 2 or 3 years, depending on the company.
What are the benefits of choosing whole life over other types of life insurance?
The difference from term life insurance is that a portion of insurance premium money is allotted to your cash value, which again could pay off your entire insurance policy in a few years. Then even your insurance premium remains constant throughout the coverage duration unless you choose not to. Unless you make a change to your insurance policy, your lifelong coverage requires no further medical exams. Whole life insurance also makes sense due to its tax savings
Life Insurance Comparison displays on a whole life insurance policy, the rate of return is much lower than that of other investments inspite of working in the tax savings. Investment professionals are likely to agree on life insurance not being used solely for investment alone and insurance policy choices should be determined by the protection and not the rate of return. But for those in need of life insurance, the tax benefits and cash values can be of great influence in purchasing protection of your dear ones.
With whole life insurance you get guaranteed coverage to the extent of the necessary premiums being paid. Insurance policies are designed to last a large duration of time either until the policyholder’s demise or till the holder retires. Meant for those desiring to cover long term needs like pensions and final expenses or for protecting financial assets. It also keeps open the possibility of building up cash value, to enable you to take a loan from your insurance company on your insurance policy if desired. Generally death benefit from insurance is tax free.
What a whole life policy can do for you!
To me the most unique feature about whole life insurance, it is a vehicle in which you can create a tax-free retirement plan, based on the current tax law.
The best way to approach this is to work with an agent who has a company that has a good history of paying dividends, or with a variable whole life policy, and the life insurance is as not important, but the tax-free retirement is what you want to accomplish. In other words, if you are planning on using your IRA/401(k) to supplement your Social Security benefits or pension, just be ready to have taxes reduce your cash.
Laws have been in place for over 100 years that the cash value inside a life insurance policy is not taxable, because the premiums used to pay the policy has already been taxed at today’s rates. It’s like paying taxes on the seed money, not the harvest money.
As a “life insurance policy” increases in value due to competitive interest being earned, no taxes are due on that gain, as long as the policy remains in force. Many financial vehicles, such as savings accounts, CD’s, mutual funds, and money markets will typically have tax liability on the gain.
Money taken out of your life insurance contract is not considered as taxable income, as opposed to income taken from your IRA/401(k). The smartest way and best way to access your money from a max-funded, tax-advantage insurance policy is by a loan, rather than a withdrawal.
The reason being:
When done correctly, it is a loan made to yourself that is never due or payable in your lifetime. To be in compliance with IRS guidelines, an interest rate is typically charged, and then that interest is offset with interest that is credited on the money you didn’t “withdraw,” but rather remained there as collateral for your loan. This results in a zero net cost in many instances.
The important thing to remember is that policy loans and withdrawals will reduce the available cash values and death benefits and may cause the policy to lapse. Additional premium payments may be required to keep the policy in force. In the event of a lapse, outstanding policy loans in excess of unrecovered cost basis will be subject to ordinary income tax.
Let’s just take a simple and brief overview—
1) You have protected your family and assets over the years with life insurance.
2) You have created a tax-free life long retirement to supplement you Social Security income.
3) Then at your death, as long as your insurance contract is still in force, any monies left will pass on to your heirs totally income-tax free.
Needless to say I like the tax-free retirement.
Thus whole life insurance permanently protects your dependents while building cash value account. In this type of insurance, the insurance company manages policies of various accounts. A death benefit is paid to your designated beneficiary with a low risk cash value account and tax-deferred cash accumulation. You have a fixed premium insurance which, provided you continue to pay the planned amount, can’t increase in your entire lifetime.
The insurance company is able to exclusively manage the cash value account in your insurance policy. You have t6he option of receiving dividends from your insurance policy or use them to reduce payments. You are also given the right to withdraw from the policy during your lifetime.
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