Life insurance helps protect you and your family from financial crises after you pass away. As you contemplate what kind of coverage to invest in, you may have questions about whether you should choose term or whole life insurance. You can make the best decision for you and your loved ones by learning more about the pros and cons of whole life insurance.
The Pros of Whole Life Insurance
Whole life insurance differs from term life insurance in several key ways. Unlike a term policy, whole insurance remains in effect throughout your entire life from the time that you buy the policy until you cash it out or die. Its renewal is guaranteed as long as you own the policy.
Whole life insurance policies can also accrue cash value after you pay premiums for a set number of years. After you pay into the policy for the predetermined amount of time, your policy will begin to earn a cash value that is yours regardless of whether or not you continue to pay the premiums.
If you cash out your whole life policy, you will receive its cash rather than face value. Likewise, you can borrow against or make tax-free withdrawals against the cash value as needed before you die.
Finally, the premiums that you pay for whole life insurance are fixed and are not subject to being raised or lowered during your ownership of the policy. Your premium will be determined on factors like:
- the policy expense costs, which include underwriting, medical exams, and management fees
- mortality cost, determined by age, gender, use of tobacco, weight, height, and lifestyle
- cash value, which includes over payments during the first years that you own the policy
Whole life insurance gives you these benefits along with a guaranteed return on your investment. These advantages could make whole life coverage your best option for you and your family.
The Cons of Whole Life Insurance
While whole life coverage does offer several unique pluses, it also comes with a few downsides about which you should be aware before buying a policy. Primarily, whole life insurance does not give you a significant payout on your investment. Your ROI will be around five to six percent of what you pay into the policy during the time that you own it.
Second, whole life insurance premiums are notoriously more expensive than what you would pay for term life coverage. In fact, you can expect to over pay into your policy for upwards of five years or possibly longer. Over payment allows your insurer to reap the substantial fees and commissions associated with whole life coverage.
Finally, whole life insurance tends to be more difficult for lay people outside of the insurance industry to understand. You may have more questions about your coverage after signing the contract than you did while shopping around for a policy. Given its’ complexity, many people choose to hire a lawyer who specializes in insurance law to interpret the terms of the policy before they sign a contract.
Still, whole life coverage can be your best option if you have assets that you want to protect in the event of your death or if you want the opportunity to build a trust from the cash value for your children and grandchildren. While it offers a modest return, this type of insurance is one of the few that offers a guaranteed investment.
It also can be ideal if you want the security of cash that you can borrow against or withdraw as you head into retirement. These facts can help you make the best financial decision for you and your household regarding what type of life insurance you should buy.