Whole life insurance as an investment can have many pros and cons. Whole life insurance can be used as an investment option for financial planning because it accrues cash value over time, making it a safe investment in the long-run. Since whole life is permanent, it guarantees that the death benefit will remain in effect as long as the insured chooses to maintain the policy and pay their premiums, never having to renew it.
Renewing a policy may mean repeating the application process, and usually results in higher monthly premiums than the original policy due to an increased risk profile. One advantage of whole life insurance is that it maintains fixed rates throughout your lifetime.
Is Whole Life Insurance A Good Investment?
The most important question to ask yourself: “is whole life insurance a good investment?” Honestly, no – whole life insurance is not a good investment for a majority of Americans. Whole coverage is significantly more expensive than term life insurance – anywhere from 5 to 10 times more expensive. We highly recommend consumers apply for a 20 or 30-year term life insurance policy, take the difference in premiums, and fully fund their retirement accounts or invest in a mutual/index fund. With compounding interest, the difference in returns over a 20 year period is huge.
Types of Payment Plans
Most whole life insurance policies have a fixed monthly premium, but some have modified terms that offer lower premiums at the inception of the policy, increasing over time. It is also possible to pay a single lump sum for a whole life policy. Some policies have a pre-set term, at the end of which the policy is paid in full and no further payments are due; other policies may require that payments be made for the entire policyholder’s lifetime.
The payment plans are structured to meet the needs of different individuals, and obviously, life insurance rates differ based on which plan you choose. For example, paying a lump sum for a whole life policy will get you a significant discount, but most policyholders simply can’t afford that.
An Alternative Savings Plan
The premium payments for whole life insurance as an investment cover the cost of the insurance, and then divert additional premiums above and beyond the minimum to the cash value of the policy. Individuals who have difficulty maintaining a savings account can use whole life to save for future expenses.
After a set period of time, defined in the policy, the cash value can be withdrawn, or it can be used as collateral for a business or personal loan in financial emergencies. The interest paid on whole life insurance is tax deferred until the money is withdrawn. The cash value doesn’t even need to be paid back as the company will simply deduct the outstanding loan from the future death benefit payout.
Different Policies and Investment Options
The two major types of whole life policies are participatory and non-participatory. In non-participatory policies, no dividends are paid on the cash value, but it does accrue interest, often at a guaranteed rate. Participatory policies pay dividends on an annual basis, which can be added to the cash value of the policy, applied toward future premiums or paid in cash to the insured. Both types of policies offer secure permanent life insurance protection, but the cost of the policy may differ.
Guaranteed Return on Investment
Unlike other opportunities, whole life insurance as an investment is secure and will provide returns on the money that is invested. On non-participatory policies, the rate of return on investments is often guaranteed, and while rates of return may vary on participatory policies, they usually provide a guaranteed minimum return.
Another attractive feature of whole life is that the returns on investments are tax deferred until they are redeemed or the cash value is withdrawn, while other investments may be taxed as capital gains as they are earned.
No Need To Renew or Reapply For Coverage
Since whole life insurance is permanent and premiums are usually fixed, it has advantages over other types of insurance which may have to be renewed. Renewing a term life insurance policy usually means reapplying for coverage, undergoing a new medical exam and higher rates.
If an insured has developed health problems during the term of the original policy, he may not be able to renew term life coverage or find new protection due to a pre-existing condition. Even if the policy is renewed, the premiums may be considerably higher than those on the original policy.
Whole Life Insurance Quotes
With instant life insurance quotes, we make it easy to compare the coverage and rates of the best life insurance companies in the U.S. MyLifeInsuranceQuotes101.com provides you multiple online quotes on different types of policies, helping you decide which one will best meet your current and future financial needs.