Whole Life Insurance: Security and Flexibility

Life insurance can be more than the money you leave behind after you die.  With whole life insurance, you can secure financial protection for you and your family if the unexpected occurs.

Whole life insurance is designed to be stable over the long term. It guarantees that your premium won’t go up unless your policy provides for a lower premium in the early years that steadily increases until you’re paying the full amount.

Whole life policies also provide you with cash value that grows over time and a death benefit that won’t decrease unless you borrow against it.

[content_band bg_color=”#e8f4f8″ border=”all”] [container] [custom_headline style=”margin: 0; 0; 0; 0;” type=”center” level=”h4″ looks_like=”h4″ accent=”true”]Key Takeaways[/custom_headline]

  • Whole life insurance offers guaranteed death benefit protection for premiums that won’t go up except by special arrangement.
  • Whole life policies allow you to build cash value at a guaranteed interest rate. You may withdraw from this amount or borrow against it at your discretion. You can also collect the cash value by terminating your policy.
  • As a policyholder, you have the option to add living benefits to your policy. Living benefits allow you to access your death benefits during your lifetime if you experience a qualifying medical event.[/container] [/content_band]

Death Benefits

The death benefit of a life insurance policy offers financial protection to the people you leave behind.

Replacing Lost Income

Four out of every 10 households without life insurance would immediately struggle to pay basic expenses if the primary wage earner died. Death benefits can help your family make ends meet if you die.

Providing Inheritance

In general, the death benefit paid under a life insurance policy is not subject to income tax.. Life insurance is a way to leave more behind for the ones you love. You can also leave a significant contribution to a charity, even if you have no other significant assets.

Paying Final Expenses

The National Funeral Directors Association estimates the average cost of viewing and burial at $7,640. Death benefits can help you lessen the burden of both these costs and any medical expenses, debts, or estate taxes you leave behind.

Cash Savings

Whole life insurance also has a cash value element. When you pay the premium on your whole life insurance policy, part of that amount goes toward covering the death benefit, and another part goes toward policy fees. The remainder goes into a cash-value account that grows based on a pre-set annual dividend rate.

Withdrawing or Borrowing Cash Value

There are two ways to take money out of a whole life policy.  You can take a withdrawal from the cash value or borrow from the cash value.  A withdrawal of cash value is more straightforward. A withdrawal reduces the total amount of cash value.  It may also be taxable.

If you borrow against the cash value of your policy, the amount of the loan accrues interest until repaid.  Often, the interest rate is set forth in the policy.  Or, the interest rate may depend on market rates.  State laws may limit the interest that an insurance company can charge.

If you do not repay any outstanding loan, the remaining balance and accrued interest are subtracted from your death benefit. An insurance policy loan does not show up on your credit report as a delinquent payment. Also, unlike when you take out a loan from a private lender, you don’t need to submit an application to borrow from your cash-value account.

Terminating Your Policy

Terminating your whole life policy also gives you access to your cash value, but you may not receive the full amount you’ve built up. When you terminate your policy, your insurer will deduct from the cash payout any outstanding loan balances or unpaid premiums. You may also have to pay a surrender charge, which covers the insurer’s cost of maintaining your policy.  There may also be tax consequences.

Living Benefits

Approximately two-thirds of people who file for bankruptcy list medical bills as a key cause of their financial problems. Health insurance is not sufficient protection. More than half of all Medicare recipients have trouble paying medical bills, and 36% use up all of their savings paying for care, even with supplemental health coverage to help with out-of-pocket costs.

If you have a living benefits rider on your whole life insurance policy, you can access your death benefits during your lifetime should you experience a qualifying medical event. A qualifying event typically fits into one or more of the following categories:

  • Terminal illness: a condition that a physician certifies will result in your death within a given time frame, usually 24 months
  • Chronic illness: a condition that, according to a physician’s certification, renders you unable to independently perform two out of six activities of daily living (bathing, dressing, eating, etc.) for 90 consecutive days or more. A condition may also qualify as a chronic illness if it leaves you cognitively impaired
  • Critical illness: a condition that requires extensive medical treatment to prevent your death. Examples include, but are not limited to, heart attack, cancer, and end-stage renal failure
  • Critical injury: an event such as paralysis, severe burn, or traumatic brain injury that requires extraordinary interventions

An insurance commissioner may also approve another medical condition as a qualifying event.

In most states, if your condition is approved as a qualifying event, you can use your living benefits for any purpose. Examples include:

  • Household expenses
  • Personal bills
  • Home modifications
  • Nursing home care
  • Adult daycare

Exceptions exist in states like Massachusetts, which only permits you to use living benefits to pay the costs of nursing home care. Those costs average $8,365 per month, or $275 a day for a private room, an amount that can pose a serious burden to a family without living benefits.

In Conclusion

A whole life insurance policy can protect your family if something happens to you, whether or not that unexpected event takes your life. Death benefits and premiums are guaranteed to be stable, and riders like living benefits can give you even more flexibility in how to use your policy.

Ask an insurance professional how whole life insurance can benefit you and your family.