What is a Whole Life Insurance?
Whole life insurance provides coverage for the life of the insured. In addition to paying a death benefit, whole life insurance also contains a savings component in which cash value may accumulate. These policies are also known as “permanent” or “traditional” life insurance.
Whole life insurance policies are one type of permanent life insurance. Universal life, indexed universal life, and variable universal life are others. Whole life insurance is the original life insurance policy, but whole life does not equal permanent life insurance.
Understanding Whole Life Insurance
Whole life insurance guarantees payment of a death benefit to beneficiaries in exchange for level, regularly due premium payments. The policy includes a savings portion, called the “cash value,” alongside the death benefit. In the savings component, interest may accumulate on a tax-deferred basis. Growing cash value is an essential component of whole life insurance.
To build cash value, a policyholder can remit payments more than the scheduled premium. Additionally, dividends can be reinvested into the cash value and earn interest. The cash value offers a living benefit to the policyholder. In essence, it serves as a source of equity. To access cash reserves, the policyholder requests a withdrawal of funds or a loan. Interest is charged on loans with rates varying per insurer. Also, the owner may withdraw funds tax free up to the value of total premiums paid. Loans that are unpaid will reduce the death benefit by the outstanding amount. Withdrawals reduce the cash value but not the death benefit.
The death benefit is typically a set amount of the policy contract. Some policies are eligible for dividend payments, and the policyholder may elect to have the dividends purchase additional death benefits, which will increase the amount paid at the time of death. Alternatively, unpaid outstanding loans taken against the cash value will reduce the death benefit. Many insurers offer riders that protect the death benefit in the event the insured becomes disabled or critically or terminally ill. Typical riders include an accidental death benefit and waiver of premium riders.