Whole life is a type of life insurance that lasts for the policy holder’s entire lifespan as long as the premiums are paid on time. Most insurance companies require the potential policy holder to undergo a medical exam before coverage is given. The longer the individual pays the premium, the more the cash value is built. If the premium payments are discontinued, and the policy lapses, the policy holder will lose their insurance; some plans may still allow the individual to have the cash value.
Whole life insurance can be categorized into three subtypes: traditional, interest sensitive and single premium. Usually, each type carries an unchanging death benefit and premium unless the policy holder decides to increase or decrease coverage. A policy’s cash value will depend on the subtype; however, whole life insurance is not considered income unless the individual withdraws money from the policy.
Traditional Whole Life
Traditional whole life carries the least risk. This type of whole life insurance is well-suited for those who want a fixed and specific minimum cash value in which to invest. Monthly premiums must be paid on traditional whole life insurance. However, premium payments can be taken from the policy’s cash value if the policy has accumulated a high cash value. This benefit allows the policy holder to make payments if they run into financial trouble. As long as the policy has cash value, the premiums can still be paid.
Interest-Sensitive Whole Life
Unlike the cash value of traditional whole life, the cash value of interest-sensitive whole life insurance will fluctuate according to the current market’s interest rate. In essence, interest-sensitive whole life has varying interest rates like some credit cards and home mortgages. Because of the varying interest rates, this kind of whole life insurance is considered more risky that traditional whole life insurance.
Single-Premium Whole Life
Out of all three subtypes of whole life insurance, single-premium policies are the most expensive. The holder of a single-premium policy is expected to pay the entire amount in one lump sum. Upon the initial investment, the policy will receive interest, allowing the cash value to increase immediately. Regardless, single-premium whole life policies are not comparable to investments like 401(k)s and IRAs.
No matter the type of whole life insurance, the policy holder will receive tax benefits because the actual cash value cannot be taxed until it is used. Potential policy holders need to keep in mind that only part of the premium is converted into a cash value; the amount allocated to the cash value varies depending on the plan. Financial experts conclude that whole life insurance policies are best for people who prefer less risky investments that do not involve asset conversions.