INSURANCE GUIDE

Life insurance is one of the best investments you can make. It provides your loved ones with financial protection when you pass away, offering them – and you – peace of mind. But, if you’re shopping around for life insurance, you’re going to find that there are a few different types of coverage options; one of them being whole life.

You may have heard that whole life premiums drop in price over time.  Put simply, your premiums will be reduced by dividend payments, which eventually can grow larger than your entire premium due.  We explain this concept further below.  Let’s explain what whole life insurance is and how it works before we address how you can adjust your dividend option.  Then, we’ll present to you the reason that whole life policies can have a reduction in the amount of cash you need to put into them.

What is Whole Life Insurance?

whole life insurance cheaper over timeJust like any other type of life insurance, whole life is meant to protect those who are financially dependent on you. In the event that you pass away, your life insurance policy will pay out the death benefit of your policy to your beneficiaries. The death benefit is the amount that your policy is worth, and the beneficiaries are the people you have stated that you want to receive your death benefit when you pass away.

Whole life insurance is a form of permanent life insurance, or cash value life insurance. Unlike term life insurance, which is only effective for a certain period of time and only offers a death benefit and nothing else, whole life offers a death benefit as well as an additional component, known as “cash value”.

In addition to a cash value account, a whole life insurance policy also pays dividends.  Dividends generally increase over time, and can be taken as cash, used to offset premium, or used to purchase more paid up whole life insurance.

Basically, the cash value component of a whole life insurance policy is a savings account that’s linked to your policy. A percentage of the premiums you pay on your policy are distributed into the savings account, and your life insurance provider pays interest on the funds that accumulate in the account.

This cash value account grows steadily over the lifetime of your policy.  You can see an illustration, if you want to see how it projects over time.  The cash value is affected by any loans you take out, and what you do with your dividend payment.

How Does Whole Life Insurance Work?

Part of whole life insurance works similarly to term life insurance, and that part is the death benefit. When you pass away, your beneficiaries will receive a pay out from your life insurance company for the amount of your death benefit; for example, if your policy offers $1 million in coverage, your beneficiaries will receive a $1 million death benefit when you pass away. This money is not taxed and goes directly to those you have named as beneficiaries.

The death benefit of whole and term life insurance are the only way that these two types of coverage are the same. As mentioned, term life insurance offers a death benefit and nothing more. Whole life insurance offers a death benefit, as well as a cash value component, as was explained above. Another way that whole life insurance differs from term life insurance is that this type of policy offers coverage for your entire life; there is no time limit.

Lastly, the premiums you pay for whole and term life insurance policies are different. With term life insurance policies, premiums can go up as you age; however, with whole life insurance policies, premiums can actually go down!

Why Do Premiums Go Down Over Time?

It can be misleading to say that premiums go down.  In reality, the premiums on a whole life insurance policy are level until the day the policy matures.  However, dividends play an important role in any whole life policy.

Use your Dividend to Offset Premium

The dividend payment rises over time as your cash value account accumulates higher and higher value (subject to the dividend rate paid by the insurance company).  Premiums go down when you use your increasing dividend payment pay the premiums.  You will need to pay the difference in cash.  Eventually, the dividend payment often grows greater than the premium payment.  At this point, you can take the excess in cash or buy more paid up whole life insurance, which further increases your dividend payment.

You will need to tell the life insurance company to use your dividend payment to offset premiums.  You don’t need to speak to your agent to accomplish this, you can call the life insurance company directly.  Keep in mind that when your agent designed the policy, he presented you certain projections.  If you change your dividend option from, buying more paid up insurance, to reducing your premiums, keep in mind that this has a material change on your future policy and you should review the new projections in the form of a new illustration.  Your agent or life insurance company can produce a new illustration at any point during the lifetime of your policy, and you can compare projections when you choose different options with your dividend payment.

Surrender Death Benefit

Another way your premium amount can drop is if you perform a partial surrender.  This keeps your whole life insurance in tact, but reduces the amount of money that your beneficiaries will receive.  If your cash value is high enough, you may even be able to surrender enough death benefit so that your policy is entirely paid up.

Whole life insurance is complex, and you will need a qualified agent to help you understand how changes to your policy affect your premium, death benefit, and future projected dividends.  Just know that you have options.

Policy Matures

Whole life insurance policies are meant to mature; in other words, the cash value component of the policy is meant to eventually equal the death benefit of the policy. So, for example, if you have a $500,000 death benefit, the money that accumulates in the cash value component of your policy will continue to grow until it is also valued at $500,000. A portion of the premiums you pay are added to the cash value savings account that is connected to your whole life insurance policy. Interest also collects on the money in the account.  Eventually, when your policy is mature, you won’t have any premiums.  Unfortunately, it is extremely hard to outlive the maturity date of a whole life insurance policy.  In 2018, the maturity date is often more than 100 years old.

Initially, the premiums for whole life insurance are higher than they are for term life insurance; however, as you age, the cost of premiums on a whole life insurance policy can actually get cheaper.

The Benefits of Whole Life Insurance

There are a number of reasons why whole life insurance is a better option than term coverage. Firstly, you’ll have coverage for your entire life, so long as you continue to make premium payments. Secondly, your premiums will go down, or at the very least, stay level, over the course of your lifetime. Thirdly, whole life insurance offers more than a death benefit; it also offers a savings account that you can borrow from, which can be a major asset.

Summing It Up

If you want your life insurance policy to offer more than just a death benefit to your beneficiaries, you want to have peace of mind knowing that you are covered for your entire life, and you also would like to have a chance at paying lower premiums over time, then whole life insurance may be a better option for you than term life insurance.