Life insurance is one of those touchy subjects no one likes to talk about, let alone research or recognize its existence. In a world that’s all about living your best life, life insurance just doesn’t fit. 

We’re here to tell you that not only is it OK to talk about life insurance, but finding the right type of policy can provide you with peace of mind.

One option to consider is whole life insurance.

What Is Whole Life Insurance, and How Does Cash Value Work?

So what is whole life insurance?

Whole life insurance is a type of permanent life insurance that pays out a benefit to the individual(s) you list as the recipients for your policy when you die. 

But part of your policy goes toward a cash value component, which is basically a tax-deferred savings account you can take advantage of later in life.

You can use the cash value to:

Whole life insurance is a guaranteed payout that you can’t outlive. Your beneficiaries will receive the payout upon your death unless you fail to make payments or cancel your policy (and pay expensive cancellation costs), or if your cause of death is excluded in your policy. 

When you die, your heirs receive the listed death benefit — but not the cash value that rose while you were alive and making payments. Any remaining cash value goes to the insurance company, so it’s a benefit to take advantage of while you’re still alive.

Term vs. Whole Life Insurance

The biggest difference between term and whole life insurance policies is the amount of time that you are covered.

Term life insurance provides coverage for specific amounts of time, usually for set periods of anywhere from five to 30 years. But whole life insurance, as discussed above, is going to pay out eventually when you die as long as your premiums are paid. 

When you choose term life insurance, you can get more coverage for lower premiums. Why? Because you’ll likely outlive your term, and the insurance company won’t have to pay out a death benefit. It also has no cash value.

Most people choose a set term life insurance, knowing they are paying a low premium purely on a policy that’s solely for financial protection in the case of their untimely death. If you look at it from a purely insurance standpoint, it’s like buying car insurance your whole life but never using it because you were never in a car wreck. 

Your premiums for personal whole life insurance are considered a personal expense, so they aren’t tax-deductible.

5 Types of Whole Life Insurance Policies

There are five main types of whole life insurance. Here’s a brief overview:

Traditional whole life insurance: Your premiums stay the same as long as you keep making them. 

Single premium whole life insurance: One large lump payment you make upfront takes care of this policy. 

Limited whole life insurance: You pick a set period, such as 20 years, for this whole life insurance option. You’ll still be insured your whole life, but you’ll only make payments during the set period, which means your payments are higher than they would be for traditional whole life insurance.

Modified premium whole life insurance: You pay lower premiums upfront, but they get more expensive as you age. 

Survivorship life insurance: These policies allow you to insure two people and are popular among spouses. The catch? It pays out only after both policyholders have died. The benefit? It’s less expensive than paying for two separate whole life insurance policies. 

What Happens When a Whole Life Insurance Policy Lapses or Is Surrendered? 

A whole life insurance policy lapses when the policyholder stops making monthly premium payments on time. The life insurance contract is labeled as no longer active, and the cash value built up on the policy is surrendered. Death benefits will no longer be paid out for these surrendered policies. 

Some companies allow policyholders to restart their policies within a certain grace period and get their lapsed payments paid within this time frame. Read the fine print to make sure you understand the rules of your whole life insurance policy lapse clause. Typically, reinstatements cost more than one month’s premium payment. 

Whole Life Insurance Pros and Cons

When you’re deciding whether a whole life insurance policy works for you, you have to weigh the pros and cons. The hard part? Decide what works best for you in your current financial situation while also weighing what works best in the long term for your beneficiaries.

What’s Good About Whole Life Insurance

Whole life insurance is appealing for several reasons, including:

What’s Bad About Whole Life Insurance

Here are a few drawbacks to consider if you’re thinking about whole life insurance:

How to Choose Between Whole Life Insurance vs. Term Insurance

We get it. This is a difficult task no matter what. Life insurance company terms and conditions and the products and services they offer are complicated and difficult to digest. But here’s a quick summary of when to consider whole life insurance vs. term insurance.

Consider term insurance if:

Choose whole life insurance if:

Are you trying to figure out what is whole life insurance? If you’re looking for a life insurance policy that has consistent monthly policy payments and allows you to draw off its rising cash value while you’re still alive, this might be an option for you. If you’re still not sure, a financial adviser can help you figure out what type of life insurance is right for you.

Kurt Schultheis is a Florida-based writer.

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