Today I’m going to talk to you about how does whole life insurance work. There’s really 3 things about whole life insurance you should know.
1. Death Benefit
The first thing is the death benefit, simply that means in the event of a claim. If I die, my family is gonna get a pot of money, whatever that amount is it could be a hundred thousand, could be five hundred thousand, could be a million.
2. Earn Cash Value
The second thing and what really distinguishes. Whole life insurance gonna build cash value. So each month when I pay my premium to the carrier, part of my money is gonna go to an account to make sure that if I die my death benefit gets paid out. Another part of that money is gonna go and it’s gonna sit in an account that’s gonna accumulate value. I tell clients to think of this as long-term savings may be similar to a long-term government bond or a long-term see date.
3. Level Premium
The third thing and one of the most important with whole life insurance that it’s permanent. And you might often hear it referred to as permanent life insurance. When I say it’s permanent, it’s gonna go forever. In other words, if you live to be a hundred years old it’s still gonna be enforced, so you can ensure that when you die the benefits gonna be there. That being said whole life insurance is a little bit more expensive than term insurance, but there are these additional valued benefits like the cash value and that it’s locked in forever. This has been how does whole life insurance work.
Now, what are the advantages and disadvantages of a whole life policy? so let’s start with the advantages.
Advantages of a Whole Life Policy
- A whole life policy covers you for your whole life as the name implies.
- It can become a major financial asset tool over time.
- It builds cash value that you can access throughout your life, that’s the life side of life insurance.
- If structured properly at some point in time with the build-up of cash value it can produce dividends, those dividends can pay the policy premium payments for you later in life. So in your 60 70 80 90 years old, your policy will still be there for you if structured properly.
Disadvantages of a Whole Life Policy.
- It’s a long-term financing tool, it’s not a short-term tool at all.
- The premiums are higher over a term insurance policy, so there is a difference between premium amounts. You’ll see that whole life premiums can be two three five times more than what a traditional term policy might be.
- A whole life policy may not fit your budget and may not cover what you look into fully insure. So you may have to look at a combination of term and whole life policies together, or maybe term insurance is the better option based on your budgets and your financial goals.
- When it comes to a whole life policy, is that the premium payments are not flexible. You’re going to have to commit for 10 20 30 40 years depending upon, the size of the policy and how you’ve designed it, for how long you’re gonna have to pay for that policy. so proper design is important.
- Not all whole life policies are created equal you look at different companies their features, the contracts of how well they perform. So you want to do a little bit of homework with your financial adviser or your insurance agent can help you with to evaluate a couple of different companies which is the right company for you to look at on the right contract.