Whole life insurance is notable because it serves a dual purpose. It provides a death benefit in case of the death of the contract owner, thus offering the major benefit of term life insurance. It also serves as an investment and savings vehicle for the policy owner because the policy builds cash value. Depending on the type of whole life policy you purchase, you can quickly build cash value into your policy, and borrow against it at low interest rates, or surrender your policy for its cash value.
Because of the investment value of a whole life policy, the premiums are typically higher than they are with a term life policy. There are a number of different payment schemes for whole life policies, so that you can usually find one that suits your circumstances and needs. Typically, you’ll pay less in premiums when the policy is first issued because you are younger and the risk to the insurance company is less. Those premiums will rise over time as you get older and the risk to the insurance company increases. This can be very beneficial for you if you’re in a position where your income will increase over time and leave you comfortably well off.
However, that’s not always how it goes. In many cases, earnings and income drop off as you approach retirement age. There are two ways that this can be dealt with in a whole life policy. The first is with a limited premium whole life policy. With a typical whole life policy, you need to keep paying premiums as long as you want the policy to remain in force. That generally means paying premiums throughout your life, and paying increasing premiums as you age. A limited premium whole life policy allows you to pay off the entire cost of the life insurance within a set period of time. Unlike term life, your insurance protection continues for the rest of your life, or till age 100; however, the premiums you pay will be considerably higher than you’d pay for term life, since you’ll be paying for a longer period of coverage.
A second option for paying premiums for a whole life policy is a level premium whole life policy. With a level premium policy, you pay the same premium amount for the entire life of the policy. In the earlier years, you’ll be paying more than the cost of your insurance, and the difference will be invested to pay for the difference between your premium and the cost of your life insurance in later years.
A graded premium whole life policy is a third option that takes into account both the likelihood of your income rising throughout your career and dropping off when you retire. With a graded premium policy, you start with a relatively small premium that reflects your lesser earning power at the beginning of your career. That premium gradually increases over time until it reaches a previously named level or period of time, then reverses and begins to drop again, making it affordable after your retirement as well.
If you decide that a whole life insurance policy is right for you, then take the time to discuss premium payment options with your financial advisor and choose the option that’s best for you.
