If you are looking to buy life insurance, there are two options available for you – term life insurance and whole (permanent) life insurance.
While they both have their own upsides and downsides, permanent life insurance scores over term life insurance in many areas and could be the better choice for you under certain conditions.
In this article, we answer the following questions:
- Why choose whole life insurance over term life insurance?
- Who needs to buy whole life insurance?
- What are the factors you should take into account while buying a whole life policy?
In addition to this, we also take a look at five of the best whole life policies available on the market today.
Why Choose Permanent Life Insurance Over Term Life Insurance?
A term policy typically has a 10, 20, or 30-year term length, after which it expires automatically.
A permanent life policy, on the other hand, does not have a fixed term length and stays in effect as long as you keep paying the premiums. So, if you are in need of lifelong coverage, permanent life insurance is your best choice.
Most permanent life policies (whole life policies being the best example) have a level premium, which means the premium does not increase or decrease for any reason at any point during the coverage period. You pay the exact same amount every month or every year until your death.
Some permanent life policies (universal life policies being the best example) have a variable premium, but it is up to you to choose the premium amount that you are willing to pay. Moreover, such policies allow you to use the money in the cash value portion to pay the premium.
Many term policies also have a level premium. The difference, however, is that when your policy expires, you need to either renew it or apply for a new policy, at which point you have to pay a much higher premium due to your age and any ailments you might have developed in the meantime.
This can be a burden, especially if your peak earning years are behind you. If you buy a 30-year term policy at 30, it will expire at 60, at which point you might be retired and find it difficult to pay the premium for a renewed policy.
Permanent life policies have a cash value portion, which is similar to a savings account. A portion of the premium gets allocated to the cash value portion regularly and it grows in value as long as the policy stays in effect.
The growth rate of the cash value portion depends on the type of policy you buy. If it is a traditional whole life policy or a universal life policy, the company pays a modest rate of interest.
If it is a variable universal life policy, the money in the cash value portion is invested in stocks, mutual funds, and bonds and its growth rate is dependent on market conditions.
Either way, when you buy a permanent life policy, a portion of your income gets invested on a regular basis, which acts as a forced savings plan.
A term life policy only offers a death benefit, which is passed on to your designated beneficiary after your death. A permanent life policy, on the contrary, not only provides you with a guaranteed death benefit, but also offers living benefits.
Once your policy’s cash value portion has sufficient amounts of money, you have the option of taking out a loan or making a withdrawal to meet your financial needs. You can also use the money in the cash value account to buy more coverage or to pay your premiums.
Many whole life insurance providers also share their profits with their policyholders by paying dividends.
The best part is that the money in your cash value component as well as the dividends you are paid are tax-free.
Who Needs to Buy Permanent Life Insurance?
If you have a spouse who does not work and is financially dependent on you or a special needs child who needs to be taken care of, you might need a permanent life policy. You can use the living benefits offered by the policy to meet your expenses and make sure that your dependents have a financial safety net even after you pass away.
If you have a large, illiquid estate, your beneficiaries might find it difficult to come up with the money to pay federal estate taxes after your death. In these types of cases, the payout from a permanent life policy could be beneficial, as it can be used to pay off the taxes as well as any outstanding bills and debts.
If you want to pass on a large sum of money to your heirs without any tax burden, a permanent life policy is the best choice for you. You can buy a policy with a large death benefit and place it in an irrevocable trust so that it cannot be added to your estate or used to pay any outstanding bills or debts.
If you need a financial safety net for your post-retirement years, a permanent life policy might be a salient option for you. In case of an emergency, you can use the money in the cash value account of your policy. If the money you withdraw is less than the premiums you paid until that point, you do not have to pay any taxes on it either.
What Are the Factors You Should Take Into Account While Buying a Permanent Life Policy?
Financial Stability of the Insurer
No matter what type of policy you are looking to buy, this is the most important factor you need to consider. This is particularly true for permanent life policies, since they do not have an expiration date.
Let us say you are 35 right now. Assuming you live to the age of 80, you need to consider if the insurance company you have chosen is stable enough to last another 45 years and meet its short term as well as long term financial commitments.
The best way to determine the financial stability of an insurer is to check out the ratings given by agencies like A.M. Best, Moody’s, Fitch, and Standard & Poor’s.
Coverage Amount and Premium
How much coverage do you actually need? It might be tempting to buy a million dollar policy, but can you afford to pay the premiums regularly? Remember – unlike a term policy, a permanent life policy does not expire in 20 or 30 years.
You have to keep paying the premiums all through your life, even in your post-retirement years. So, whether you choose a level premium policy or a variable premium policy, make sure you can afford to make the payments regularly – month after month and year after year.
One other option you have is to choose a single premium policy (you have to pay the entire premium amount in a single payment) or a limited payment policy (you have to pay off the entire premium amount within a particular period of time) to avoid the burden of premium payments in your post-retirement years.
Steady Growth vs. Variable Growth
If you want your cash value portion to grow at a steady rate, irrespective of market conditions, you can choose a whole life policy or a traditional universal life policy, both of which have a cash value account whose rate of interest is determined by the insurance company.
If you, on the other hand, want your cash value component to grow quickly, you can choose an indexed universal life policy (the cash value portion’s growth is linked to the performance of an index fund) or a variable universal life policy (the cash value portion’s growth is linked to a variety of investments like stocks, bonds, and mutual funds).
The downside with indexed and variable universal life policies is that if the market conditions are not favorable, your cash value account could take a hit.
Optional Dividends vs. Guaranteed Dividends
With some permanent life policies, dividends are optional – the company pays dividends only if it makes sufficient profits. With some other policies, dividends are guaranteed – the company pays dividends irrespective of its performance. The difference, however, is that policies with guaranteed dividends are more expensive than policies with optional dividends.
Best Whole Life Policies – Our Top Five Picks
MassMutual Whole Life Policy
A.M. Best: A++
The policy offers a guaranteed death benefit, which is paid out to your family in the event of your death. There is a cash value account, which keeps accruing interest as long as the policy stays in effect. Dividends are optional, but MassMutual has paid dividends to its policyholders every single year since 1869.
Northwestern Mutual Whole Life Policy
A.M. Best: A++
Apart from a guaranteed death benefit and a cash value portion which grows at a guaranteed rate, the policy also pays dividends from time to time. Considering the fact that the company pays billions in dividends almost every year, you are likely to be paid on a regular basis.
The whole life policy also comes with a wide range of riders, which can help you plan for several contingencies and expand your financial safety net. In 2017, Northwestern Mutual was ranked number one by Fortune Magazine in the ‘Quality of Products and Services’ category.
Guardian Whole Life Policy
A.M. Best: A++
The death benefit is guaranteed and the premium stays unchanged throughout the policy term. The cash value grows at a guaranteed rate. Guardian, since it is a mutual life insurance company, pays dividends regularly. In fact, since 1868, it has paid dividends to its policyholders every year.
United of Omaha Income Advantage Indexed Universal Life Policy
A.M. Best: A+
The policy offers lifetime protection and the cash value portion’s growth rate is linked to the performance of an index fund. Index funds are generally more profitable than stocks, bonds, and mutual funds, so you can expect to see significant growth in the long term.
The best part is that the policy has a downside protection provision, which means your cash value account is protected even under unfavorable market conditions.
If the market nosedives, your cash value account receives a zero percent interest, but does not actually lose value. This is an excellent feature, which secures your investment irrespective of market conditions.
Sagicor Sage No Lapse Universal Life Insurance
A.M. Best: A–
The policy is available to those within the age limit of 85 and has a guaranteed death benefit. The interest rate for the cash value portion is fixed at 2.5%. The policy has a ‘no lapse’ provision and stays in effect as long as the premiums you pay meet the minimum no lapse value set by the company. The policy includes an accelerated death benefit rider at no extra cost.
The best part is that the policy does not require any telephone interviews, lab tests, or medical exams, like all of Sagicor’s products.
How to Choose the Right Permanent Life Policy?
The information given above can help you choose the right permanent life policy for you. A permanent life policy, by definition, is meant to cover your lifelong financial needs. So, take a strong look at all the options available and choose one that is best suited for your family’s needs. Be sure to read our guide on the best whole life insurance companies.
NoExam.Com – Your Insurance Guide
The insurance experts at noexam.com can help you find a permanent life policy that is ideally suited for your budget and long term financial needs. If you can tell us what kind of policy you are looking for, we can help you choose the right policy from the right company.
If you have no idea what kind of policy is best suited for your family, you can just tell us about your financial commitments and the number of dependents you have. Based on that information, we can choose the right policy for you.
Best Whole Life Insurance Policies by Jonathan Holloway