In order to understand this type of policy, I think it is best to look at the main features. Then we can contrast it to other types of coverage you may purchase. This will help you understand why people choose whole life, or why they prefer another type of policy.
- Guaranteed Coverage for a Lifetime - These are permanent policies. This means as long as the policy is kept in force, it will still provide coverage at a fixed premium. It does not expire after a term. Some policies have provisions to pay out the death benefit at a certain point, like age 100, even if the insured person is still alive. This lifetime coverage is why many people consider this product for retirement age life insurance.
- Fixed Premiums - The premiums to fund the actual insurance are set for the policy lifetime. Be aware that some term policies may only guarantee premiums for a few years, and not the whole time length of the contract.
- Possible Asset Growth - Any money that is over the amount it takes to actually pay for the coverage can actually grow a cash value. A whole life policy can actually be an asset because of this if it has been in force long enough to grow a cash value. While many experts would contend that most whole life policies are not the best way to save money, some types of policies are specifically designed to serve double duty as both insurance and savings. Some pay a fixed interest rate. Others are actually pegged to grow at some market index, like the S&P 500. The cash value could be borrowed against or cashed in by the policy owner.
Advantages of Whole Life
Why do people buy permanent coverage? Here is a short summary of some good reasons to consider lifetime policies.
- It provides lifetime coverage.
- Premiums do not increase.
- Some policies can be paid up of a period of time, and so you can have lifetime coverage without worrying about future bills.
- It can grow a cash value that can be borrowed against or cashed in.
- Many smaller face value policies are especially designed for older people, so it can be one way for older people to find a policy that will accept them.
Disadvantages of Permanent Life Insurance vs. Term
Not everybody buys whole life, and in fact more people probably buy term these days. What are the drawbacks?
- It costs more. Because it provides lifetime coverage, and because it may grow cash value, it will cost more than temporary coverage that does not have the other features.
- Because of the cost, people can afford to purchase a lot more coverage if they choose a term life policy.
- Some term policies can be converted to permanent policies at a future date. This could give a person the option to purchase a higher face value now while they have kids to support or a mortgage to pay off. Later, when they just want enough of a death benefit to pay for final expenses, they could covert their policy without having to prove they are healthy.
Which Type of Policy is Best For You?
That question would be answered differently for different people. Sometimes the right answer is to buy both so you have covered all of your bases. Other times you may just want to purchase temporary coverage now, but make sure it has an option to covert to permanent later.