What is whole life insurance? It is life insurance that provides coverage for an individual's whole life rather than a specified period or term. Built into most whole life plans are the cash value or loan value, which builds up over time and can be used as a form of investment. When you are shopping for life insurance you may wonder what is whole life in comparison to other life insurance plans.
The difference between whole and term life insurance is that term is just an insurance policy that pays a death benefit whereas whole life is combined with an investment component as mentioned above. The investment can take many forms such as bonds, stocks or even money market accounts. The life insurance policy builds cash value, assuming you pay your monthly premiums, which you can borrow against. The similarities between whole and term life are that you can lock in the same monthly payment over the life of the policy.
The three most common types of whole life are:
- Traditional policies
- Universal policies
- Variable policies
Whole life insurance plans are expensive but you need to remember that you are paying for both a life insurance plan and an investment vehicle. Some agents categorize this type of insurance as a 'retirement plan' but the cost of high fees and commissions, which can reduce your annual return by 3%, make them less viable as a cost-effective investment option.
It is also harder to keep track of where the premiums will go-into fees, insurance or investments. Typically, all of the first year's premiums will be eaten up by up-front, yet hidden commissions. It literally takes an expert to tell you if the whole life policy you are considering will ever present itself as a decent investment. It can take years or more for a whole life policy to ever realize a meaningful return. Keep this in mind when you are considering cashing out your policy. If you have held onto it now for 10 years or so you could lose more money than if you just let it sit for another 5 years.
Whenever you are researching whole life insurance be sure to check out the insurer's ratings. If you find that a particular insurance company has shown some signs of financial weakness you might want to consider a different company altogether. The soundness of the insurer will make all the difference in whether you receive a pay out 20 or 30 years from now.