Is a Whole Life Policy Right for You?
Whole life insurance, commonly known as permanent life insurance, is a life insurance policy that is intended for the long-term. Whole life insurance costs approximately five times the average cost of term life insurance, but it comes with a large number of benefits that pay for themselves over the life of the policy.
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So is a whole life insurance policy the best choice for your family? To answer that question, you'll need to look at your own financial situation.
- Are you young? Whole life insurance is best purchased when you're younger. This is because the best benefit of whole life insurance is the fact that you lock in your premium when you're young, when it's usually lower. That premium stays with you for life.
- Do you want lifetime coverage? If you only want life insurance long enough to protect your family until your mortgage or student loans are paid off, then a term life insurance plan may be your best option. On the other hand, if you want to use life insurance as a long-term investment vehicle, then you'll want whole life insurance.
- Do you plan on being rich? If so, then you need to look into whole life insurance. Whole life insurance is an excellent tool to help reduce the tax burden on your family should you pass away. Typical estate taxes could run as high as 45% of the total estate's value. A whole life insurance benefit is completely tax-free, and its cash value account is tax-deferred (tax-free up to the total amount that you've paid in your premiums).
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Benefits of whole life policies: taxes
Estate planners love whole life policies. Why? Whole life insurance provides a legal and beneficial tax shelter for estates. The estate tax is one of the highest tax rates in the U.S. and it claims around half of an estate's value.
Tax planners have become smart to the loopholes, though, and have found an effective way to avoid this tax by electing to have trusts set up, and to use the benefits of a whole life insurance policy through these trusts. Death benefits, withdrawals, and the entire cash value (including any earned cash value through investment) are all tax free or tax deferred.
Other benefits of whole life insurance policies
Of course, this is only one of the benefits of a whole life insurance policy. Whole life coverage also provides a stable and steady premium that never changes. The term of the policy is for life, so insurance companies generally can't cancel the policy or add exclusions. You can also invest the cash value of your policy, withdraw from its cash value, earn dividends, and even take out a loan using the cash value as collateral.
The downside of whole life policies is that they are much more costly that term life insurance. Despite this, they may actually end up saving more cash through tax benefits and guaranteed lifetime rates, coverage, and eligibility.