Whole life insurance, term life insurance, permanent life insurance, universal life insurance, are you confused yet? Life insurance is full of complicated terminology but don’t worry, understanding your options is easier than you think. The first thing you need to understand is that there are multiple types of life insurance. Why? Because life insurance isn’t one size fits all.
The variety of life insurance plans on offer helps you find a plan that’s a great fit for your needs While this can make shopping for life insurance seem more difficult it also means that whatever your coverage needs are there’s a plan to cover them! So how does whole life insurance work? The simple answer is that the policy holder pays a premium for life insurance coverage, then when they pass away the plan pays out a death benefit to the beneficiary named on the plan. But there are other things you should know about whole life insurance before you buy a policy:
1. Whole Life Insurance Is One of Two Main Types of Life Insurance
Whole life insurance, also known as permanent life insurance, is one of the two main types of life insurance and is available from many life insurance companies. These types of plans provide policyholders with coverage that lasts for life. The other main category of life insurance is term life, which provides individuals with a life insurance policy that offers coverage for a set amount of time known as a term. Term plans are commonly available with policy lengths, they have guaranteed level premiums for 5-35 years, the actual policy and coverage goes beyond that “duration” for an increased premium. What makes whole life insurance unique is that it offers a guaranteed life insurance payout to the beneficiary as long as the policyholder continues to pay the required premiums. This is a huge benefit to people who want coverage to cover costs related to end of life expenses as policyholders don’t need to worry about their coverage expiring.
2. Whole Life Plans Provide Lifelong Coverage
Perhaps the biggest advantage whole life plans have over term policies is that these plans guarantee policyholders coverage for life. People choose whole life insurance over term life plans for many reasons but one of the most common is needing coverage that guarantees a payout. Individuals generally turn to life insurance because they want to provide financial protection for their loved ones, whether it’s to replace their income, cover debts, or even as a legacy that helps them in the future. Some of these items have specific durations, for example, if a spouse wanted to leave their partner enough money to pay off the mortgage on the family home they know that the debt will only be a problem for the length of the mortgage. To protect their spouse, they only need to purchase a term policy that will cover the remaining duration of the mortgage. However, there are many things that people want to leave money for that don’t have a fixed length, such as money to pay estate taxes or cash to cover funeral costs. In these situations, whole life plans provide an affordable way to leave a cash lump sum to protect your loved ones from struggling to find money to pay for the expenses.
3. Whole Life Insurance has a Built-in Savings Component
Lifelong protection is not the only benefit of whole life insurance plans. In fact, whole life insurance can be a strong component of a retirement plan as it provides a tax-deferred and potentially tax free savings alternative to conventional options. You might be surprised to learn that whole life insurance comes with a built-in savings component that can accrue interest and in some cases dividends. When you pay your life insurance premiums you will not only be paying for coverage you will also be contributing part of that premium into the accumulation value of the plan. The money in the savings component is invested in one of a number of ways and depending on the type of plan you choose the money will earn interest at different rates. The interest rate offered by a plan may or may not be guaranteed, we’ll discuss the types of whole life insurance in more detail below. People choose whole life plans as part of their retirement planning as they provide an additional method of tax-deferred savings. This is especially beneficial if other tax-deferred methods of saving have already reached the maximum contribution limit for the year. Before choosing a whole life insurance policy you should closely examine how your policy invests the savings, whether your policy can lose value, and how interest rates are determined.
4. There are Three Main Types of Whole Life Insurance
There are numerous types of whole life insurance plans available, which can make choosing a plan confusing for many people. However, you don’t need to worry, understanding the basic difference between these plans will make it easy to choose the right policy for your needs. To really answer the question, ‘how does whole life insurance work’ you’ll need to know about the different types of whole life plans. We’ll examine three of the common types of permanent life insurance below:
Standard Whole Life Insurance
Standard whole life policies provide all of the main benefits associated with a whole life insurance plan including a fixed premium for the duration of the policy, a guaranteed death benefit, and a policy cash value. The cash value earns interest and can be accessed before the policyholder’s death to provide income during retirement or even pay the policy’s premiums. The policy may receive dividends or interest based on the insurer’s revenue for the year.
Universal or Adjustable Life Insurance
Universal life insurance is a flexible form of permanent life insurance that lets policyholders adjust their coverage to meet their evolving needs. This unique type of plan provides individuals with the option of increasing or decreasing their premiums and adjusting the policy’s death benefit. Universal plans offer a great form of coverage for people who need permanent life insurance but don’t want to be tied in to a specific coverage level for the duration of the policy. These plans are commonly chosen by people looking for whole life coverage, low fixed premiums, and a guaranteed payout.
Survivor Life Insurance
Survivor life insurance covers two people with one plan and is often purchased by couples or business partners. The plan pays out its death benefit when both policyholders have passed away. This whole life plan is a great option for people who will want to provide coverage for expenses that are triggered by their deaths, such as business costs or estate taxes. Survivor plans are more cost effective than two individual plans and are available as both standard whole life or universal life policies.
You’ll Probably Be Required to Have a Medical
Whole life insurance policies generally require applicants to undergo a medical exam. Whole life insurance plans have a complex underwriting process that is designed to help the insurance company calculate the right premiums for the policy. Although no one looks forward to medicals, the life insurance exam is nothing to worry about and can be completed at your convenience in your own home. The medical generally takes less than thirty minutes and consists of taking simple measurements including your weight, height, and blood pressure. You will also be required to provide a blood and urine sample. The insurer will look for any signs of serious illness or results that point to an increased likelihood of health problems in the future. This information is then used to determine how much the applicant will pay for the requested coverage amount. Those with serious health conditions such as diabetes or heart disease will be charged higher premiums.
6. Your Age at the Time of Application Will Play A significant Role In Determining Premium Cost
When a life insurance company determines the premium cost for your policy they look at a number of factors including your age. When you take out a life insurance policy the insurer will complete a number of calculations to estimate your expected life span. So, the younger you are when you apply for a plan the lower your premium will be as you’re expected to have more time to contribute payments to your plan. You’re also less likely to have developed serious health conditions when you are young, which also helps keep premium costs low. This means that you shouldn’t put off enrolling in a life insurance plan as waiting could result in higher premiums.
7. Many Life Insurance Agents Don’t Recommend Whole Life Insurance Plans
It seems counterintuitive to buy a life insurance policy that only lasts for a fixed period and doesn’t guarantee a payout, but that’s exactly what many agents recommend. Term life insurance may not offer lifelong coverage or a guaranteed death benefit but it does have one significant advantage over whole life insurance: cost. Term life insurance premiums are significantly lower than whole life plans because the insurer has a relatively lower probability of having to pay out on the policy, whereas with whole life plans they know they will need to pay the death benefit. However, this doesn’t mean that term life plans are suitable for everyone, in fact there are times when whole life coverage is essential. If you need to leave coverage for any expenses that are the result of your death such as end of life expenses or estate taxes you should secure permanent coverage. If you only want insurance to cover expenses that have a fixed length like childcare costs or mortgage balances you should explore term life insurance options.
8. Calculating Your Coverage Needs is an Essential Step in Finding the Right Plan
Getting an answer to the question, ‘how does whole life insurance work’ before you buy is essential, but knowing your coverage needs is just as important! Without a clear idea of how much coverage you need you run the risk of not securing enough coverage to protect your loved ones from financial difficulty after you pass away. Calculating your coverage needs involves adding together the cost of any expenses you want to cover with the policy’s death benefit, such as income replacement, college fees, funeral costs, etc. Once you’ve completed your coverage needs analysis you’ll be able to confidently choose the death benefit amount for your life insurance policy.
Find a Life Insurance Policy Today
Shopping for life insurance can be a long and complicated process but it doesn’t have to be. IntelliQuote has developed an online life insurance marketplace that lets you compare policies from the best-rated life insurance companies in the US in just a few minutes. Use our quick and easy quote request form to get instant access to quotes, now! Still wondering: how does whole life insurance work? Our team is available to help, call today to speak to our licensed life insurance agents.