Understanding Whole Life Insurance

WHAT IS WHOLE LIFE INSURANCE?

Whole life insurance lasts your whole life, hence the name. It doesn't matter if you were to die tomorrow or when you're 132, the insurance will be there to pay out the full face amount.

Most people use Whole Life Insurance policies to cover their final expenses / funeral costs, to leave behind money for loved ones, or both.

HOW DOES LIFE INSURANCE WORK?

  Whole Life insurance will remain constant for your entire life. The premiums will never change and the face value will never decrease. Depending on which whole life policy you choose, it can even increase up to double the original face value with accumulated interest.

Premiums
Premiums can be paid Monthly, Quarterly, Bi-Annually, Annually, and in one Lump Sum. Monthly payments can be accepted as a direct withdrawal from your checking / savings account, directly from a Social Security Card / Credit Card, or through direct bill pay (paper mail).

Beneficiaries
Whole Life Insurance pays out to your beneficiary(ies) in the form of a lump sum payment. You are able to chose anyone to be your beneficiary and it can be split between multiple people (if you want to leave the benefit to both of your children for example). 

Some term policies give beneficiaries the option of receiving monthly payments as an income-replacement. If the breadwinner of the family were to die, this means the widow/widower still has money to pay the bills and won't spend a lump sum too quickly and be unable to keep up with the bills.

It is wise to alert whomever you name as your beneficiary to the fact that they are going to be receiving the face value of the policy when you die. It is also wise to tell them specifics with where the policy is and what you want done at your funeral.

In Pennsylvania, if you do not leave your insurance policy to a beneficiary, it will automatically go to your estate, which can then be taxed. Check with your state for the laws on not naming a beneficiary on an insurance policy.

Dividends

Some Whole Life policies offer dividends. These dividends can be used to pay the premium, grow the face value, or as cash in your pocket. Be careful that you don't get tricked into thinking a Universal Whole Life policy is the same as pure Whole Life. Universal policies give dividends, but their price will eventually increase - read more here.

Whole life insurance is owning your insurance, therefore, it comes with different options:

Cash Value

As you pay your premiums, the insurance company invests your money in the stock markets and they give you some of that investment back in the form of interest or Cash Value. All the money that you're paying in is growing the entire time, therefore, the more money you pay in, the greater your Cash Value will become. A Whole Life policy that grows cash value can be used as a sort of forced savings account, with higher interest rates than a bank, while also providing protection in the case of your death. Once the cash value begins accumulating you have access to the money in that account. You can take the full cash value amount at any time by communicating with your insurance company and they will drop the policy coverage. You will be able to use the money for whatever you'd like.

Loan

Because the account is growing cash value, you are able to access that money in the form of a credit free & tax free loan. Meaning you are able to take out a loan for as much as is available to you from the premiums paid in and the accumulated interest. It typically takes a few years (5-10) before the policy starts to accumulate a decent amount of cash value, which grows as the policy matures. You can use the loan on anything with minimal restrictions, just keep in mind the loan isn't from your cash value, it's a loan with the life insurance company and they use your cash value as collateral. 

The loan is credit free so it doesn't matter what your credit score looks like, you can still borrow the money. You don't even have to pay the loan back! Depending on the Whole Life policy, you can use your dividends to pay for it or the face value decreases by the amount of the loan. For example, if you have a $100,000 policy and take a $10,000 loan out, and don't pay it back, the policy's face value will decrease to $90,000.

"If the loan is not paid back before death, 
the insurance company will reduce the face amount
of the insurance policy when the claim is paid."
- Ted Bernstein

There is reason to pay back the loan, not paying is more so for an emergency. Loans against your life insurance policy still have a typical interest rate, around 7 - 8%. The accumulated interest can really cut in to the face value of the policy, which in turn affects the amount your beneficiary will receive upon your death.

Paid-Up Option

You have the option to stop paying for your policy whenever you want. The company pro-rates the amount of money you paid in with the face value of the policy and locks that amount in place. 

For example, if you have a $100,000 policy and you pay in around $40,000 and when you turn 65 you decide you no longer want to pay premiums, the company will lock in place an amount such as  $85,000.

You will never have to pay premiums on your policy again and the face value will remain locked in place, gaining interest, until you pass and it goes to your beneficiary.

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Do you know who will be forced to pay for your funeral if you don't take action while you're still alive? Whole Life Insurance is meant to cover your funeral costs and leave a little extra behind for your spouse / children / grandchildren.