Provided that monthly premiums are maintained until a pre-specified age in the agreement, a whole life insurance policy is specifically designed to pay out upon death. Once this age is reached, a whole life policy continues for the remainder of the insured's life. Part of the premium goes towards providing coverage and the remainder is placed in the provider's investment portfolio. It is amongst the leading alternatives to level term insurance, which only provides coverage for a defined period of time.
Advantages of Whole Life Insurance
- Coverage for life. Unlike term insurance, the insured will be covered for the entirety of their life. This means that they will receive a payment upon death regardless of whether they die at 25 or 90.
- Tax free. The payment upon death will normally be completely free of income tax. The benefits can also be made payable to someone outside of that person's estate.
- Guaranteed premium. The premium is set at a fixed level and will not change at any point.
- Cancellation of the policy. The insured is able to cancel a whole term life insurance policy at any time and have the cash value returned to them.
Disadvantages of Whole Life Insurance
- Cost of coverage. As the likelihood of death increases with each passing year, the cost of whole term life insurance will be greater. This could create affordability issues for many families. Level term insurance may offer a cheaper alternative.
- Wrong policy. Not everyone needs insurance for the rest of their life. Many advisors have sold coverage that is inappropriate for that individual in order to earn a healthy commission.
- Use as an investment. Many people take out coverage for the wrong reason. Whilst whole of life insurance could act as an investment, its cash-in value is low compared to other alternatives. Despite the fact that the returns are guaranteed, the stock market has historically offered a far better return.
- Inflexible investment. It isn't possible to improve the return by investing in different stocks or bonds as the entire process is handled exclusively by the policy provider.
Pros and Cons of Whole Term Life Insurance
Although the cost of whole life insurance is higher, the insured will benefit from coverage for the remainder of his/her life. A whole life policy may not be appropriate for all families. It may be that coverage is only needed until the mortgage is cleared or until the children have completed their education. If this is the case, level term insurance and/or a critical illness insurance policy may be more appropriate.
Asa Ghaffar - Asa has over 10 years of practical experience in loan approval, secured lending, bad credit repair, stock trading and debt management.
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