Whole life insurance is a permanent type of life insurance with a savings feature called cash value, also known as the equity. When consumers compare term vs. whole life, they will need to analyze the pros and cons of each, including coverage, cash value, investment options, and premiums, to determine which is better suited for their family. Life insurance quotes will show that whole rates are more expensive than term premiums.
This is because whole life offers advantages not available in term policies, like cash value and guaranteed payment of the death benefit. Below, we will discuss the elements of life insurance consumers should research comparing whole life insurance quotes.
Guaranteed Payment of the Death Benefit
Term life insurance only pays the death benefit if the insured person dies within the term period, which can be anywhere from 3 months to 30 years. If the insured person does not die within the policy term, the insurer makes no payment and keeps the premiums.
Since whole life insurance is permanent, payment of the death benefit is guaranteed whether the insured person dies at age 25 or age 90. No matter what, all or some of your premiums will be returned to you. Guaranteed payment of the death benefit is one reason that whole life insurance quotes are higher than term life quotes.
Part of the premiums paid into a whole life policy is diverted into a savings feature called the cash value or equity. The rate of interest paid on the cash value is guaranteed. When researching different kinds of contracts, it is fundamentally important to consider that part of the premiums are returned to the policyholder in the form of cash value, which actually makes whole life coverage cheaper than it initially looks.
The bottom line is that, despite whole life rates looking more expensive than term, part of the money paid is returned as cash value.
In fact, experts and financial advisors actually suggest that, over your lifetime, term and whole premiums are about the same. Whole life has a fixed death benefit and premiums which never increase. Term life insurance is temporary coverage and the premiums increase each time the policy has to be renewed or replaced.
The real determination when comparing premiums is whether you have better investment opportunities than the guaranteed, low-interest returns offered by whole protection. For more sophisticated investors or individuals with a strong grasp of financial markets, whole life insurance is not the best investment vehicle. Those consumers would be better served just buying pure term life and taking their extra cash and investing directly into the stock market via mutual funds or stocks.
Permanent Coverage Cannot Be Cancelled
One of the biggest advantages of whole contracts is that, once the policy is issued, the insurance company can only cancel it for non-payment of premiums. With term life, if an insured person becomes ill during the term period, they may not be able to obtain new life insurance when the contract expires.
This is another benefit of whole life, and why online quotes for whole policies are higher than other types of coverage. Because whole life is guaranteed to remain in force with no rate increases, even if a person becomes uninsurable after it is issued, consumers are more protected over the long-run.
Term vs. Whole
The advantages that term life insurance offers to consumers are cheap rates, affordability, and the flexibility to change coverage as your financial needs change. The fixed whole life death benefit may mean that the policyholder is paying for more than he or she needs at times, while at other times, the policyholder may not have enough protection to cover their financial obligations.
An example of this can be when families buy a home and take on a huge mortgage, suggesting they may need a larger death benefit. Otherwise, when the married couple retires and all the kids become independent and leave the house, the need may be much less.
Return of Premiums
Return of premiums (ROP) life policies return the premiums paid, with interest, to consumers when the policy expires. The amount is paid in a lump sum and is different from the cash value of permanent contracts because it cannot be redeemed or used as security for loans during the policy term.
Return of premium term life insurance may address some of the advantages whole life has over term, and consumers who really care about potentially wasting premiums can consider this option. When evaluating rate quotes, in order of cheapest to most expensive, we have standard term, ROP term, and permanent whole life insurance.
Calculating Insurance Rates
Whole life insurance quotes are calculated based on the amount of the death benefit, the insured person’s health risks, medical history, age, and lifestyle habits at the time the policy is issued. Your average life expectancy is used to determine the length of time you can be expected to make payments and thus the profitability of underwriting the contract and insuring you.
Factors such as smoker vs. non-smoker, fit versus overweight/obese, and family medical history of cancer or heart disease can all affect your life insurance quotes. While term rates are based on similar criteria, they are also based on the length of the contract and the odds that the death benefit will be paid.
As An Investment
Whole life insurance accrues value and can be used in financial planning to meet future goals like college tuition, a down payment for a home, or retirement. The money in the whole life equity is considered a liquid asset since the insured can redeem the cash value or use it as collateral for a loan quickly and without any penalty. Other long term investments like IRAs and CDs usually have penalties if the money is withdrawn early.
Other considerations of whole life as an investment include the fact that the cash value pays interest. Although the interest rate you earn on your cash is relatively small, whole policies act like a forced savings account for families who just can’t seem to put away money for retirement. The interest rate is guaranteed and stable, and the investment has almost no risk of loss.
In following the mantra “higher risk, higher return”, it is important to note that other investments, such as the stock market, can return higher yields, but with increased risk. Whether whole life as an investment option is right for you depends on your risk appetite and financial goals.
Returns on savings accounts or stock portfolios are subject to income tax, and in some cases capital gains tax, when they are paid. The returns are tax deferred until they are withdrawn from the policy. Loans against the cash value account are not considered income and are not subject to taxes, so a policyholder can use up to 90% of the policy cash value without any tax liability.
Universal Life Insurance
Universal life insurance is another type of permanent coverage with a cash value, but unlike whole life insurance, it has a minimum and maximum premium, and payment amounts can increase over time.
Universal life invests the equity in financial markets, such as stocks, bonds, commodities, and mutual funds that are riskier than the investments used in whole coverage. Universal can also lapse if the cash value reaches zero and the death benefit is tied to the cash value. When comparing universal and whole life insurance quotes, these risks should be taken into account.
Universal Life Insurance Rates
Universal life insurance is typically more expensive than term policies, but priced cheaper than whole coverage. When getting free quotes to compare term, whole, and universal, consumers should remember that if the cost of administering the policy increases, the rates of universal life will also increase. Universal is less secure, both as an investment and as life protection, than whole coverage.
The other issue is that whole rates are difficult to compare with universal rates, since universal policies have minimum and maximum premiums that are flexible. Again, if permanent life insurance sounds like the better type of product for your needs, choosing between whole and universal protection really depends on your family’s financial goals and needs.
Free Whole Life Insurance Quotes Online
The easiest way to find cheap life insurance rates is to get free quotes online. We work with several of the best companies to bring you free and instant insurance quotes. Consumers can use us to compare rates side by side to find the lowest term, universal, or whole life premiums. Individuals are asked to complete a short questionnaire with basic information, such as age, gender and health data, and rate quotes are available.
Comparison shopping helps consumers get the top value for their dollar by finding the best coverage and rates. When evaluating insurance quotes and different kinds of coverage, the security and investment value of policies should be balanced against the lower cost of term and universal protection.