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Whole life insurance can be a prudent choice for people who want to stay insured throughout their life. It also offers several other benefits that term life insurance does not.
In this article, we take a look at the benefits of whole life insurance, the different types of whole life policies available, the factors to consider while buying whole life insurance, and the best whole life insurance companies in the industry today.
Top Five Whole Life Insurance Companies
Established In: 1851
A.M. Best: A++
Standard & Poor’s: AA+
New York Life
Established In: 1845
A.M. Best: A++
Standard & Poor’s: AA+
Established In: 1868
A.M. Best: A+
Standard & Poor’s: AA–
Established In: 1857
A.M. Best: A++
Standard & Poor’s: AA+
Established In: 1860
A.M. Best: A++
Standard & Poor’s: AA+
All five of these companies are financially stable. They have a very good track record in terms of claim settlements, and have been in the industry for well over a century. They also offer a wide array of life insurance policies along with riders. You can compare the policies with each other and pick one that meets your budget and needs.
Why Choose Whole Life Insurance over Term Life Insurance?
Term insurance, by definition, has a fixed term, which could be anywhere from 10 to 30 years. Once it expires, you have two options.
You can stay uninsured for the rest of your life. This is only possible if you do not have any financial obligations or people who are financially dependent on you.
You can apply for a new policy. You might find it difficult to qualify due to your age and health condition. Even if an insurer accepts you, they are likely to charge a higher rate compared to what you previously paid for your policy.
This is not an issue at all with whole life insurance. It offers lifetime coverage for the policyholder. You will stay insured as long as you keep making the premium payments. It can be very beneficial, especially if you happen to have a spouse who does not work and is financially dependent on you.
Term life insurance has a death benefit, which your beneficiary will receive after your passing. Other than that, there are no living benefits associated with a term life policy.
Whole life insurance, on the other hand, not only has a guaranteed death benefit, but also has a cash value component. A portion of the premiums you pay is allocated to the cash value component, which earns interest throughout the term of the policy.
The cash value component is similar to a savings account, which you can tap into in case you are in need of money. You can either withdraw money or take out a loan from the cash value component.
The amount you withdraw is tax-deferred, as long as it does not exceed the premiums you have paid into the policy. If you take out a loan, on the other hand, you have to pay it back with interest. In case you fail to do so, the outstanding amount will be deducted from your death benefit.
Many whole life insurance companies also pay you dividends on an annual basis. These companies distribute a portion of their profits evenly among all the policyholders. Some policies offers guaranteed dividends, which means you will be paid dividends every year. Some other policies offer non-guaranteed dividends. This means you will be paid dividends only when the company makes sufficient amount of profits. The dividends you receive from your whole life policy are also tax free.
Whole life insurance offers you lifelong coverage. It also provides living benefits like cash value and dividends. These are not available with term life insurance. So, despite the fact that it costs more, a whole life policy is a better choice for you in the long term compared to a pure term policy.
Now, let us take a look at the different types of whole life policies available.
Different Types of Whole Life Policies
A non-participating whole life policy is the simplest and also the most affordable choice for you. It usually has two components – a death benefit and a cash value component which accrues interest at a fixed rate. The premiums remain the same throughout the term of the policy.
It is called ‘non-participating’ because you, as an individual policyholder, are a non-participant in the investment activities of the company. So, you will not receive any dividends from the profits the company makes.
It has three components – a death benefit, a cash value component which grows at a fixed rate, and dividends which are paid out on an annual basis. As a participating policyholder, you are technically one of the owners of the insurance company. This means you are eligible to receive a share of the profits the company makes.
Participating whole life policies typically have a higher premium than non-participating policies.
This is similar to a participating whole life policy, wherein you receive dividends in addition to the death benefit and the cash value component. The difference, however, is that the dividends are used to buy additional coverage on your existing policy. So, every time the company pays dividends, your death benefit increases.
The only downside is that if the insurance company’s performance is exceptionally poor, your death benefit might get reduced.
In this type of policy, the premiums stay the same throughout the policy period. You have to pay the exact same amount every month for as long as you are insured.
This type of whole life policy requires you to pay the entire premium amount in a lump sum. A significant portion of your payment is allocated to the cash value component, which continues to grow at a steady rate throughout the term of the policy.
In this type of policy, the premium does not remain the same, but changes from time to time depending on the insurance company’s performance. If the company performs well, they charge you a lower rate.
If they perform poorly, they charge you a higher rate. It should be noted that these policies usually come with a guaranteed maximum premium. No matter how badly the company performs, your premium payments will not exceed the guaranteed maximum amount mentioned in your policy.
This type of policy limits your premium payments to a shorter term, within which you have to pay the entire premium amount. The timeframe depends on the policy you choose and the terms of the insurer.
The advantage of this policy is that you can pay off the full amount of your policy in 10 or 15 years and do not have to worry about making monthly or yearly payments for the rest of your life. The disadvantage is that the premiums are usually higher compared to a regular whole life policy, due to the shortened payment schedule.
In this type of policy, the cash value component is linked to market conditions. If the market performs well, the cash value grows at a faster rate.
If it does not, the cash value grows at a slow rate. Similarly, the premiums are linked to the insurance provider’s performance. If the company performs well, you will be charged a lower rate. If it does not, you will be charged a higher rate.
Just like indeterminate whole life policy, this one too has a maximum guaranteed premium, which is the highest rate the company can charge you irrespective of market conditions and its performance.
Factors to Consider While Buying a Whole Life Policy
The amount of death benefit you need depends largely on your age. If you are young, you might want to provide your beneficiaries with a lot of money in the event of your untimely death.
In which case, you should calculate the coverage you need by taking into account various factors including your mortgage, children’s education, and any other financial commitments you might have.
In case you are older and need money for your retirement years, you might require a relatively smaller amount, since you are not likely to have any major ongoing financial obligations after your retirement.
If you are in your 60’s or 70’s and do not have any financial obligations or anyone who is financially dependent on you, you might need a policy only to cover your funeral expenses and to pay off small amounts of debts and outstanding bills, if any.
If you are young and in good health, you should choose a fully underwritten whole life policy. This policy will require a comprehensive medical exam. Its the best way for you to find the lowest possible life insurance rate. You are more likely to get accepted in the Preferred or Preferred Plus category.
If you are older and have health issues, you might still want to apply for a fully underwritten policy. Some insurers have relatively lenient underwriting guidelines. If you do not qualify, you can opt for a simplified issue policy. This will require you to answer a some health-related questions, but no medical exam. You could also opt for a guaranteed issue policy (no questionnaire, no exam).
Whole life rates are typically more expensive than term policies, but it does not mean that you cannot find an affordable policy. The rates usually vary from one insurer to another. Get multiple quotes, compare them with each other, and choose a policy that is relatively cheaper than the rest.
Premium Payment Schedule
Are you okay with making monthly payments for the rest of your life? If so, a regular, level-premium policy should be a good choice for you. If not, you should press the button for a limited payment policy with a shortened payment schedule or a single premium policy.
Cash Value Interest Rate
The cash value component in your policy usually grows at a fixed rate, which is predetermined by the insurance company. So, ask for quotes from multiple companies and choose the company that pays a relatively higher interest rate.
A policy with a cash value component may be a good fit if you are young, have a steady source of income, and are not likely to dip into the cash value component
If you are older, it might not be a good option for you. You need the cash value component to grow at a steady pace in your retirement years, which is when you might need it the most.
Why does the Financial Rating of an Insurance Company Matter?
One of the key factors you should take into account while buying whole life insurance is the financial rating of the company.
The financial stability of a company matters the most because insurance, by definition, is a long term commitment. So, it is advisable to choose a company with strong fundamentals and is likely to be around for a long time from now. The best way to determine the financial strength of an insurer is to check their financial ratings.
Agencies like A.M. Best, Standard & Poor’s, Moody’s, and Fitch rate insurance providers based on their assets, cash flow, statutory reserves, and long term financial outlook.
Insurance companies that consistently receive high ratings from these agencies are likely to be financially very stable and have the capacity to meet all their commitments – both in the short term as well as long term.
Which Whole Life Policy Is the Right Choice for You?
There are several types of whole life policies available for you to choose from, as explained above. You can choose the right type of policy for you based on a number of factors including age, income level, financial needs, and number of dependents.
If you are young, you can choose a policy whose growth is linked to market conditions, since you can afford to take risks. If you are older and averse to taking risks, you can choose a policy whose cash value grows at a steady rate.
No matter which type of whole life policy you decide to buy, make sure you get quotes from different companies and choose the best offer – both in terms of cost and the benefits offered.
Best Whole Life Insurance Companies by Jonathan Holloway