The term “Whole Life Insurance” applies to a life insurance policy that lasts for the entire life of the insured, provided that all premiums are paid on time and the policy is not surrendered before its maturity. A whole life insurance policy represents a contractual agreement under which, if the insured dies, the insurer is obligated to pay out the policy’s death benefit to the insured’s beneficiaries. An insurance policy like this can provide more than just a death benefit; it also builds a tax-free cash value.
How does Whole Life Insurance work?
Having whole life insurance means you will be covered for the rest of your life, as long as you keep paying your premiums. Upon your death, your beneficiaries file a claim with the insurance company, and they review your death details and pay your death benefit. The death benefit can help ensure your loved ones are not financially burdened upon your death. It allows them to manage all your funeral arrangements without dipping into their savings or investments. You must inform your loved ones about any life insurance you have. Beneficiaries could have difficulty claiming their payouts if they do not know they are beneficiaries.
Components of Whole Life Insurance
In order to decide on the right life insurance policy, it might be a good idea to learn about the basic components of whole life insurance. Besides providing valuable information, this also clarifies any additional questions you might have in your mind.
The following are basic components of a whole life policy:
- Premiums
- Cash Value
- Death Benefit
- Beneficiary
- Maturity
1. Premiums
Premiums for whole life insurance are fixed based on your age when you purchase the policy. According to the contract, the insured must pay premiums until death, which usually don’t increase with age. Since it is a life insurance policy, the premiums are typically higher compared to term life insurance policies, which are limited in duration. Whole life insurance policies are guaranteed to stay active for as long as the premiums are paid.
2. Cash Value
Whole life insurance offers additional benefits by building a guaranteed cash value, which provides the policyholder with financial security while they are alive. A “Cash Value” is a living benefit that works both as a savings account and investment for the insured. During their lifetime, policyholders have the option of withdrawing or borrowing from their cash value.
| Note: Whole-life policyholders can access the cash value of their policies only when they are alive by taking out loans or withdrawals. When a policyholder passes away, the whole life insurance death benefit is paid to the beneficiary, but the insurer is entitled to retain the excess cash value. |
3. Death Benefit
It is a tax-free amount paid by the insurer to the beneficiary upon the insured’s death. A person’s whole life insurance policy is essentially a death benefit policy; this is the main reason people buy life insurance. When you say you have $100,000 in life insurance, it actually means you have $100,000 in death benefits. The “Death Benefit” is intended to cover costs associated with your death, such as burial, funeral, estate planning, and debt settlement.
4. Beneficiary
At the time of purchasing a life insurance policy, it is mandatory to designate a Beneficiary. The beneficiary of a whole life insurance policy is the person who will receive the death benefit after you die. Your choice of beneficiary is highly personal as it is based on your values and financial status. If you wish to change beneficiaries on your policy, you need to fill out a form provided by your insurance company. You can designate one beneficiary, such as your parents, your spouse, a child, a trust, or more than one beneficiary. The choice is yours!
| Tip: Reviewing your beneficiaries every three years or after major life events ensure that your policy is still according to your wishes. As advised by the Insurance Information Institute, you should also designate a contingent beneficiary, who will receive benefits in case the primary beneficiary cannot be found or dies. |
5. Maturity
The policy will lapse when the policyholder reaches 100, which is called its “Maturity Date”. Generally, a whole life policy matures when the buyer dies or reaches the age of 100, whichever occurs first. When this occurs, the cash value is paid, and the policy is terminated. As of 2009, some whole life insurance policies began increasing the maturity age to 120. The main benefit of increasing maturity is that the death benefit remains tax-free.
The Bottom Line
If you are interested in purchasing a whole life insurance policy, we recommend you consider consulting a local insurance agent. After reading this article, you will have a better idea of what you need to discuss with your agent to determine which insurance policy best suits your needs. Your agent can guide you through all options and help you make the right choice. By doing so, you’ll be sure that you’ve chosen the best life insurance policy for you and your family!