While there can be many different types of life insurance with many
different names that vary from company to company, three major types of life
insurance exist: whole life, term, and universal life. Whole life insurance
provides coverage over the entire life of the owner. With whole life insurance,
the owner of the policy is buying the policy itself, and cash value. The
additional cash value of a whole life policy is obtained because a portion of
each month’s premium is invested by the insurance company and earns a
guaranteed amount of interest for the policy owner; usually around 4%.It should
be understood that the cash value of a whole life policy is not accrued
quickly. In fact, the policy will usually not have any cash value until after
the first two or three years. In addition, for most policy owners, they will
not have any large amount of cash value until after several years. The cash
value of the policy can be taken from the policy as a loan if needed while the
owner is still alive.
However, the money must be paid back into the policy. Otherwise, the death
benefit of the policy will be lowered by the outstanding loan. The advantage of
a whole life policy is that the premium is set at the age in which you purchase
the insurance. The younger you are when you buy the insurance, the lower your
premiums will be. The premiums of a whole life policy usually never increase
throughout the life of the policy. The disadvantage of a whole life policy is
that the cost of the insurance at any age is going to be higher than with other
types of life insurance because you are buying more than just life insurance.
You are also buying the cash value side of the policy. A person who is
purchasing this type of insurance must decide if buying the cash value is
really important to them.
Many financial experts actually try to dissuade individuals from buying
whole life policies because they can buy term life insurance at a much cheaper
rate. These experts suggest that people buy term life, and then invest the
extra money they have from not buying whole life in stocks, bonds, or other
investments themselves—instead of paying an insurance company to do it. Whole
life polices also come with other options, such as riders to insure spouses and
children and paid-up additions which allow interest and dividends from the cash
value to help pay the policy early so that you don’t pay on it for life. These
options should be discussed in detail with your insurance agent. Whole life
insurance can be purchased from many major companies, such as MetLife,
New York Life, and Prudential.