We Define Whole Life Insurance in Simple Terms

To define whole life insurance, let's look at some of the components of a whole life insurance policy.

Coverage for Life
The policy is set up to last for your whole life, not just a portion, like term life insurance, which you buy for a set number of years.

We Define Whole Life Insurance in Simple Terms

As long as you pay your monthly premiums, the policy remains in effect, regardless of your age or your health. Plus, the premiums never increase. What you pay when you buy the policy is what you pay when you end it.

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Participating Policy

When you choose to take a whole life insurance policy, you can also to choose a participating policy. What this means is that the insurance company that you have purchased the policy with will evaluate their earnings and expenses at the end of every year.

If the earnings are greater than previously planned, or their expenses are less than planned, then they will provide a dividend to all participating whole life policy owners.

This dividend is not guaranteed, but can be taken as cash, used to reduce the premiums, or to increase the amount of coverage.

Beneficiaries
Just as with all types of insurance, a whole life policy must have a beneficiary. But unlike a term life insurance policy, a whole life policy has living advantages. Advantages include the policy may used to secure a loan and you can make cash withdrawals.

Cash Value
The premiums you pay are not just an investment in your death, they build real cash value over time. This money may be withdrawn or used as collateral for a loan. You may have to pay taxes on a cash withdrawal. Any withdrawals or loans will be deducted from the death benefit when a claim is put in.

There is a great strategy that you can employ as a business owner, using the cash value of a whole life insurance policy to pull retained earnings and cash out of your corporation tax-free. To find out more about this strategy, complete the Whole Life Insurance Quote.

Why Are Whole Life Insurance Quotes So High?

As you can see from the two graphs above, the cost of insurance (COI) for both the Whole Life Insurance Policy and the Term Life insurance policy is the same.

When you take a term insurance policy (for example T20), the T represents the term, and the 20 represents the number of years in the term. A T20 policy will have a fixed payment for 20 years. After 20 years, the insurance cost will go up. The payment for the T20 policy will be the total cost of insurance divided equally over the 20 year term.

The Cost of Insurance is less the younger you are and increases each year as you age.

Whole life policies cost less per month the younger you start paying for it, but in the long run it all equals out. Term life premiums may seem low at first, but increase with each renewal.

If you maintain the coverage over your lifetime, the total amount you pay over the years will be roughly the same as if you had bought a whole life policy.

To define whole life insurance rates, you need to consider why the premiums are so high. First, there is a definite possibility that the company will have to pay out. Second, the premiums never increase, regardless of your health or age.

The rate you signed up at is locked in for as long as you keep the policy. There is no renewal and no limit to how long you can keep your policy.

Wages increase, but your premiums stay the same, so after a few years they won't seem that expensive at all. Plus, the policy holds real cash value you can use if you need to.

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Instead of looking at the high premiums, focus on the returns. With a term policy, the premiums you pay are gone. To define whole life insurance: the premiums insure your life, increase your savings and are considered a real investment you can borrow against.

Instead of setting money aside for these three investments, you do it all with one little monthly payment. That is making your money work for you. The value far outweighs the cost.

How do Insurance Companies Define Whole Life Insurance?

Marketing divisions in life insurance companies like to define whole life insurance as "Death benefits with a savings plan." Some life insurance professionals say this is not quite accurate. As the cash reserves build up against the death benefit, the the net amount of risk is reduced.

We Define Whole Life Insurance in Simple Terms

When you first buy an insurance policy, the company holds all the risk. If something happens within a year of purchasing the policy, the company must pay out the full value of the policy out of their own funds.

The longer you survive and pay premiums, the less the company has to pay from their own funds.

That is why these insurance professionals consider it more accurate to define whole life insurance as a single, indivisible product.

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From the insurance company's point of view, there is no separation between the cash value being built and the death benefit. The company is setting this money aside, because eventually, the benefits will have to be paid.

This makes the cash part of the future payout, and that is why the insurance company does not pay the beneficiaries the cash value plus the death benefit. Only the death benefit is paid, and only the after any loans or withdrawals have been deducted. Your beneficiaries are generally not required to pay taxes on the benefits; however, if you make a withdrawal, then that money may be taxable.

Where Do Your Premiums 'Go'?

The insurance company does not literally 'set the money aside'. Just like your savings in a bank account, this money is used by the company to make more money. The money is invested, hopefully profitably. By keeping the premiums you pay in a special account, the company would always end up paying out more than it takes in. Where the money is invested is never revealed to policy holders.

Another thing you are not told is exactly how much of your premium is going towards the savings portion of your policy. Every premium payment has insurance costs and administration costs deducted first.

The returns on the savings portion depends on extra interest, investment earnings, how much the company saves on paying out benefits, operating expenses, and how the board of directors feels. The board basically decides how much cash value your policy holds.

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To define whole life insurance in a few simple words would be to say it is more than just life insurance, it is an investment.

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