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Understanding Whole Life Insurance

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Whole life insurance is the pure permanent life insurance that guarantees the life-insured a lifetime of insurance coverage as long as the required premiums are paid throughout the life of the policy or when the policy is paid up.

Whole Life Insurance Advantages

Guaranteed Death Benefit

Whole life insurance is a life insurance contract between the life-insured and the insurance company and as long as the terms of the contract are satisfied, the insurance company will pay the beneficiaries of the life insured the death benefit agreed upon which is guaranteed throughout the life insured’s lifetime as long as the policy is in force.

Guaranteed Level Premiums

Premiums for a whole life insurance policy are guaranteed to stay level for the lifetime of the life insured. It is usually higher compared to a term life insurance but it will never go up as you age.

With term life insurance, your premiums are at their lowest at the start of your contract especially when you’re young but it gets expensive overtime at every renewal as the renewed premiums are based on your attained age at renewal.

Whole life insurance can be paid off in lump sums, 15, 20, 25 years, up to age 65, or throughout the person’s lifetime.

If you plan to make annual or monthly premium contributions, the cheapest would be what is termed a life pay, which means that you’re going to have to contribute premium payments throughout your lifetime but then again, if you sum up all your contributions, this can easily become that most expensive option.

Guaranteed Cash Values

Another advantage of a whole life insurance policy that is often overlooked is the guaranteed cash values that a whole life policy offers its policyholders.

Some people may argue that the guaranteed cash values inside a whole life policy are not as much as the cash values on a Universal Life Insurance but then this is because the cash values in a whole life insurance contract aren’t necessarily invested in the markets, which means that your insurance death benefit isn’t dependent on market performance.

In essence, the guaranteed cash values in a whole life insurance policy are surplus or excess premiums after your costs of insurance and charges are deducted but then this does not mean that you don’t have a potential for higher cash values as mutual insurance companies actually offer non-guaranteed cash values on top of the guaranteed cash values, especially for participating whole life policies.

On the other hand, If you’re looking to invest, grow your asset, or save for retirement; outside of a life insurance policy, there are specific vehicles that you can take advantage of like a TFSA and RRSP.

Is Whole Life Insurance Worth It?

If you have kids, a spouse, or anyone else who is financially dependent on you, any life insurance protection is worth it! This is because life insurance protects the financial interest of your loved ones.

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Life insurance makes it a point that your loved ones don’t have to worry about the costs that may arise upon your death, or that their lifestyle and future will drastically be affected. This means that they never have to be poor even when the breadwinner passes away prematurely.

I know it’s morbid but it’s important to plan for the unexpected or risk your family’s future should you pass away unexpectedly.

For people who have grown up kids, that cost may only be your final taxes and funeral or memorial service(s), not unless of course if you have a sizeable asset that you want to pass on to your next generation.

So, is whole life insurance worth it?

Depending on your personal situation and goals. Permanent life insurance is surely worth it and depending on your preference it may come in the form of Whole life insurance or universal life policy.

If you’re reading this article, you may be risk-averse and you’re looking at guarantees. In that case, whole life insurance is just worth it!

If you’re young and you’re looking for asset accumulation from within your life insurance policy and you don’t mind market fluctuations then a Universal life insurance policy may be best for you.

Either way, you need permanent life insurance for your permanent obligations. Permanent obligations are our financial obligations that have no end date.

For example:

Income and mortgage protection have an end date to them, which means that these are non-permanent needs and can be protected with a term life insurance.

Legacy, charitable donations at death, and final expenses like memorial services and taxes at death don’t have specific end dates to them as we never know when our loved ones are going to need the benefits. These must be protected with permanent life insurance like a whole life policy.

As I said in one of my articles, it isn’t a battle between term life insurance and permanent life insurance. These plans should work together to protect your temporary and permanent needs.

Should a person know when exactly he or she is going to leave this earth, a term life insurance policy will be the perfect fit but then we don’t know this.

No one knows, we know that everyone will pass away, eventually. We just don’t know when that’s why it’s best to have some form of permanent insurance that will stay in force for the rest of a person’s life.

The good news is, that most people will live long lives. The bad news is, that a lot of people who live long lives actually die uninsured because they haven’t planned for it by implementing a permanent life insurance policy like whole life insurance.

Participating vs. Non-Participating

There are generally two types of whole life insurance policies. They are participating and non-participating whole life policies.

kids joining hands

Participating in Whole Life Insurance

The unique advantage of a participating whole life insurance policy is that it lets the policy owner participate in the earnings of the account.

Participating in whole life policies works much like a cooperative. As the policy owner, you are entitled to receive policy dividends whenever the company’s whole life account makes a profit.

Here’s how it works:

Premiums paid into participating whole life insurance policies are deposited into the account and invested by the insurance company. This account is affected by investment returns, death benefits paid, and expenses.

As a participating policyholder, your policy dividend is credited to your policy in the form of a dividend.

At the time of your life insurance application, you can decide on how you want to receive or use your dividends. These are called dividend options.

You can either receive your dividends in cash which can be paid out to you annually, or you can offset it as a premium reduction.

You can also keep your dividends inside your policy to buy additional death benefits to enhance or increase your death benefit, or keep the dividend as deposits that top up your cash surrender values or purchase paid-up additional death benefits.

Non-participating Whole Life

Non-participating whole life insurance, on the other hand, is a whole life insurance policy that is commonly issued by de-mutualized insurance companies. In short, these are insurance companies that have gone public.

A mutual insurance company is not a publicly-traded insurance company which means that they are actually “owned” by permanent insurance policyholders. Hence, being able to participate in the profits of the policies.

Non-participating whole life insurance is straight-forward whole life insurance that has guaranteed cash surrender values, death benefits, and premiums.

No dividends are offered or issued with non-participating whole life policies.

Which Is Better, Whole Life or Term Life Insurance?

Is term insurance really better than whole life insurance?

Term life insurance is cheaper at the onset but it can be very expensive at old age.

Whole life insurance, on the other hand, can be more expensive than a term life insurance, especially if you’re implementing a large amount of death benefit which can be a little too expensive for the regular mom and pop but this does come with equity and if you implement a participating whole life policy, it can also come with policy dividends.

long term, short term

Choosing between a whole life insurance policy and a term life insurance policy all depends on a person’s affordability.

Permanent plans like whole life and universal life insurance seem to cost more on monthly or annual contributions but cash values and dividends make up for these. It’s like saving money inside your policy, much like you would save in your bank… the only difference is that you have the death benefit protecting your family in the unlikely event that you or your spouse should pass away unexpectedly.

As your life insurance advisor, I would recommend having both.

Whole life or universal life gives you long-term protection.

Term life insurance, on the other hand, protects your loved ones from your non-permanent obligations like mortgage, loss of income, etc.

Structured whole life insurance with a term life rider helps you afford a higher life insurance protection that helps you build cash values at the same time.

If affordability isn’t an issue, whole life insurance gives you and your family guaranteed protection, guaranteed premiums, and guaranteed cash values and options to receive dividends.

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