How exactly does a whole life insurance policy work? Whole life policies are popular with some select groups of people, but they are a little more complex than their plain vanilla, easy-to-understand term life insurance counterparts.
The business of insurance has to be one of the most underrated services offered in the United States nowadays. Not many people think having life insurance is important, and because of this, we see that the industry is not as successful as the auto and homeowners insurance business. It is important to know, however, that death comes at any age. If a person wants to protect their family or other people after their death, they must purchase a life insurance policy.
There are two basic types of life insurance in the United States that work in completely different ways and have different premiums. One of these types of insurance is called a temporary policy. This policy covers a policyholder for about 5 to 30 years, and their premiums are most of the time stagnant. On the other hand, we have a permanent policy in which members are covered for life as long as they pay all their premiums. Part of your premium will go toward a little saving portion of the policy that will accumulate over time. The other portion of the premium goes towards the insurance cost of the death benefit.
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Whole life insurance is one of the three types of insurance policies that you can obtain if you want a permanent life insurance policy. This means that your whole life will cover you for life and that your cash value (saving portion) will get higher as time goes by. However, whole life is different in that your cash value is tax-deferred until the beneficiary withdraws it, and you can also borrow against it.
A person should consider whole life insurance when the need for coverage is lifelong. The whole life may be used as part of your estate planning because it accrues money after a person pays the premiums, as mentioned before. Because premiums for this type of policy are much higher than those of temporary policies, a person must know that this is what they want after all. Whole life is a good choice if you want to make sure that your family or dependents have a good life after your death and that the transition from the death of a person close to their lives is a close one. Within the whole life realm, there are six different kinds that a person can choose from.
1. Non-Participating Whole Life Insurance: This type of whole life policy has a leveled premium and a face amount throughout the entire policyholder’s life. Since the policy has fixed costs, the premiums will not be necessarily high, but it will not pay you any dividends after the policyholder dies.
2. Participating Whole Life Insurance: This type is much different from the first type mentioned. One of its differences is that this one does pay dividends, and because of this, premiums can be a little bit more expensive. These dividends can be used to reduce your premium payments because they can be paid in cash, they can be left to accumulate at a specified rate of interest, or they can be used to purchase additional insurance, which in turn will increase the value in cash that a beneficiary will receive after a policyholder’s death.
3. Level Premium Whole Life Insurance: This kind of insurance has the same premiums with no significant drop or rise in the money paid monthly through the entire life of the policy. At first, the premiums will be enough to cover the services given, and a small portion of it can be put away to cover the premiums that will come in later years when the cost of insurance in the market rises. The insurer can also pay extra premiums that will go toward the cash value part of the policy on the policyholder dies.
4. Limited Payment Whole Life Insurance: This is the type of policy that will allow you only to pay premiums over a specified period of time. This means that if you only want to pay premiums for about twenty to thirty years or up until age 65 or 85, you want this type of policy. Because premium payments will be paid over a specified period of time, your premium payments will be significantly higher. Still, after you get done with them, you will be covered for life.
5. Single Premium Whole Life Insurance: This type of policy is very common for people who select the whole life insurance type. This is a limited policy with a single relatively large premium due to an issue. Because the policy owner will pay the single premium payments when the policy is first signed, the life insurance policy will immediately have cash and loan value! This type of whole term life insurance is mostly an investment-oriented type than some of the others.
6. Indeterminate Premium Whole Life Insurance: This is the easiest type of whole life policy to understand and one of the most common ones in the life market. With this insurance, the company will give you a premium based on how the company is doing economically and on expense costs. This means that while one year, the premiums can be slightly lower than expected, in the next, the company can charge more if they are not doing up to expectations. It is also good to note that there is a maximum guaranteed premium when you first sign your policy and that the life insurance company can never charge the premium stated
While the cost of whole life coverage is substantially higher than a term life policy with the same death benefit, it is important to keep in mind that the reason for the price difference is that the death benefit for the whole life policy will almost certainly be paid out – after all everyone dies sometime! With the term policy, the insurance company is counting on not paying the death benefit out on over 90% of the policies it issues.