Whole-life insurance is probably the most controversial insurance product available to consumers. It’s not for everyone, though everyone should consider it. This website was created to serve as a type of database for frequently-asked questions about whole-life — or “permanent” — insurance.
What is Whole Life Insurance?
Whole-life insurance is a type of insurance where you’re covered for the rest of your life rather than just a set amount. For example, if you make whole-life insurance payments for 20 years and then stop for 10 years before death, you’ll still be eligible for the cash value plus interest of whatever you paid in while you paid in. This is different than term insurance where you are only eligible for anything while you actually pay in.
Whole-life insurance is often misunderstood as being strictly life insurance. It’s not — it’s much more than life insurance. It’s a type of retirement insurance, bankruptcy insurance, and banking product that can be utilized to help the insured individual become and stay debt free, retire earlier, and have something put aside in the event of bankruptcy.
The Advantages of Whole-Life Insurance.
There are plenty of unique advantages to whole-life insurance that term-life insurance simply doesn’t have. Of course, there are plenty of types of whole-life insurance policies, so you’ll need to talk with an insurance representative to understand the specifics of the type you choose. Still, here are the general advantages:
- Guaranteed Payout. When you buy term-life insurance, you only get money when you die. And that’s at roughly 2% of the time. You’re essentially playing a numbers game with an insurance company. Hint: they’re going to win. Whole-life insurance guarantees that every dime you spend is going to get a return of some sort — no gambling required. It also helps insure you have something in case of bankruptcy, as well as giving you an extra source of interest-free credit down the road. Many whole-life insurance buyers aren’t even buying it for the life-insurance part.
- Cash-Value Credit. If you have cash value, then you can borrow against it interest free. In other words, if you have enough in your cash value, then you can stop paying interest to the bank when buying a car, your mortgage, or anything else. This can help you get debt free literally years earlier. This is called the infinite banking concept — it’s when you literally become your own bank.
- Retirement Income. If you end up eventually paying off your house and cars, you’ll most likely be able to move away from debt altogether, which means your cash-value life insurance suddenly has another purpose down the road — retirement income. As you use the cash-value as retirement income, note that this will cut away at the death benefit, obviously. On the plus side, you essentially get the death benefit of your life insurance while you’re still alive. This is why many people use it without planning on using the death benefit much if at all.
- Bankruptcy Proof. In many states — you’ll need to check with a lawyer about yours specifically — whole-life insurance’s cash value is protected from bankruptcy court. In other words, if you go bankrupt, you still get to keep what you’ve put into your whole-life policy. This is a popular tactic used by entreprenuers who have a strong cash flow, simply because the future is uncertain — insuring against bankruptcy can be a great call.
The Disadvantages of Whole-Life Insurance.
The disadvantages of whole-life insurance are obvious… it’s expensive in the short-run. There are also a substantial number of requirements for qualification.
In the short-run, it’s much more expensive and has more fees than term-life insurance. If your main goal is to just get a death benefit, you should get term life insurance. The benefits of whole-life aren’t the death benefits so much as the other options.
What Should You Get?
It depends on your goals. Regardless of what you choose, term is the best pure life insurance policy, whole has different advantages related to being bankruptcy proof, getting debt free, and building an extra retirement income. It really depends on your goals.
Finance isn’t one-size-fits-all. Feel free to talk with your financial planner about which is best for you.