Whole Life Insurance Explanation

This is part three in a series of articles explaining the various types of life insurance products. To start at the beginning please click here.

Whole life insurance or permanent life insurance is pretty much what it sounds like. Typically the customer pays the life insurance company a regular, level premium and in return, the life insurance company will pay the customer’s designated beneficiary the death benefit or face amount. As long as the customer continues to make premium payments the policy will not expire. You need to be careful as some companies offer whole life insurance that only guarantee coverage for your lifetime, but do not guarantee that the premiums or death benefit will remain level.

The advantage over term life insurance is that your policy does not expire after a set time period. This means that if your health deteriorates, then you won’t have to worry about qualifying for life insurance in the future. The disadvantage to buying whole life insurance is the cost. It is usually much more expensive than term life insurance. This is mainly due to the fact that the life insurance company is certain to have to pay you a death benefit at some point in the future as long as you continue making premium payments since your coverage lasts the rest of your life.

Whole life insurance premiums are also higher than similar term life insurance premiums because most whole life insurance policies have some sort of cash value. This is like a savings account that builds up inside the policy that you can take loans against or receive if you cancel the policy. Since whole life insurance usually has level premiums the life insurance company is overcharging you in the early years when you are healthier and have less chance of dying. The life insurance company is required by legislation to credit you part of this extra amount you pay in the early years in the form of cash value. In the later years, when your chance of dying increases, the life insurance company is actually undercharging you for the death benefit protection since you are still paying the same premium. The insurance company then uses the early gains to pay for the losses in the later years.

Example of reason to buy whole life insurance:

Pay for funeral or burial expenses.

Whole life insurance is a good way to make sure that your final expenses are not left for your family when you eventually die. You can purchase a death benefit amount equal to the cost of the funeral and burial options that you want or you can purchase based on the premium you can afford. The whole life insurance policy should only be kept until you save enough money outside of the policy to pay for your final expenses on your own. Once you have enough money saved up to pay for your own funeral you will not need the whole life policy anymore.