Whole life, also known as straight life or permanent life insurance, provides lifelong protection for a specified amount. Whole life is in fact term life insurance with the addition of an investment component. Life insurance has many advantages over term life insurance.
Lifetime policies are generally a bit more expensive, but work especially well for estate planning, as the policy can be set up to pay estate taxes on death. This can save heirs hundreds of euros because the estate does not have to be settled through the government. Other benefits of life insurance include:
· The value of the policy grows over time due to the investment aspect of the plan. The policy owner can also decide how to use the dividends from a life insurance plan. They can be used to pay premiums, buy more insurance or be paid in cash to the policyholder.
Premiums remain the same for life. With this in mind, it is often best to buy when you are younger to get lower premiums.
· Whole life insurance policies have a guaranteed cash value. This means that a portion of the money deposited into the policy builds up guaranteed cash value. If you decide to surrender the policy, meaning you sell it before the death of the policyholder, the cash value will be there for you. The policyholder can also use the policy to borrow money at cash value as a policy loan with the current interest on the policy loan.
· The accumulated cash value can be used at retirement to supplement retirement income.
· The cash value is tax-deferred until you withdraw it.
· Part of the premium goes to your cash value. In this way, the entire policy could be paid off in a few years.
· Unless you change your policy, you will not need to undergo any other medical tests to maintain the insurance.
Different types of life insurance
The most common types of life insurance are traditional, interest-sensitive, and single premium. Traditionally it has a guaranteed minimum return of cash value. Interest rate sensitive has a variable return on its cash value, such as an adjustable rate mortgage. This gives the policyholder the option of increasing the death benefit without increasing premiums. Single premium is when a person has a large sum of money to buy a policy upfront. This type of life insurance still has the same tax deferral and builds cash value.
When you shouldn’t put your money into a life insurance policy
Life insurance may not be used as an investment vehicle. Most experts agree that even with the benefits of tax deferral, a lifetime policy is not a good way to make long-term investments. If you’re looking for an investment strategy, there are other options that provide higher returns and cost less. There is also what is known as a “lost opportunity” fee. This happens because your money is tied up in a lifetime policy when you might have used it to invest in other options that would have provided more value than the insurance policy. It’s best to talk to a financial advisor to determine if a lifetime policy is right for you.