Published: March 2015
Life insurance is like a blanket of security for someone who depends on you financially, and it can be an important part of an overall financial plan. But what type of life insurance is best?
The answer is different for everyone, of course. This primer on one common option, called whole life, can help you decide whether it should be in the running for you.
Whole life is one of three main types of permanent life insurance, and the most common, according to the Insurance Information Institute (III). Like all permanent life insurance policies, whole life combines a savings component with life-long protection — as long as premiums are paid, whole life provides a death benefit after you die, regardless of how far off in the future that may be.
Certain aspects of whole life insurance can make it an appealing choice.
Your premiums and death benefit are fixed. In most cases, the premium and death benefit stay constant for the duration of a whole life policy. That means you likely won't have to worry about cost increases as you get older, and your loved ones will know the amount of life insurance proceeds to expect when you do pass on.
You can withdraw funds or take out a loan. A whole life policy can serve as a source of emergency funds for you if something goes wrong; you can also take out a loan against the policy for something like college tuition. That's because a portion of each of your premium payments is funneled into a savings component of the policy called the "cash value." Over time, the cash value builds, and you're able to withdraw funds or borrow against it. The rules on how and when you can do that vary by company. And there are guidelines to follow, so that you don't inadvertently reduce the death benefit or create a tax burden.
You have a guaranteed rate of return. The cash value of a whole life policy is guaranteed to earn a minimum amount of interest, according to the non-profit financial planning group Life Happens.
So, when might a whole life policy make sense for you? Life Happens says a whole life insurance policy might be a fit for someone who likes predictability over time, since whole life offers death benefit guarantees, guaranteed rates of return and fixed premiums.
You may want to talk it over with an agent and review other options before you make any decisions. That way, you can be confident you've chosen the life insurance policy that's suited just for you.