Having a life insurance plan may be more pressing than ever. According to the CDC, the average life expectancy is 78.7 years old. Having a plan in place can help protect your loved ones from the unforeseen difficulties that may arise if a main source of income is lost. A life insurance policy can provide added protection. Whole life insurance is a popular choice.
There are many ways to go about choosing a plan, but the first step is deciding if whole life insurance is right for you. Whole life insurance is worth it if you’re hoping to maximize your family’s financial gain. We encourage you to think about your dependents and how you can help provide peace of mind for your loved ones in the event of a loss.
What is Whole Life Insurance?
Whole life insurance is a permanent life plan that provides coverage throughout your entire life. The premiums tend to cost more than a term plan would, but getting this insurance plan may be beneficial in the long run.
The whole life insurance cash value usually ends up being high, but payments grow in a tax-deferred account at an established rate. The premiums won’t change over time and the death benefit is certain, regardless of the time frame. In this sense, the policy functions as an investment and the death benefit payout usually reflect this. Typically, the death benefit in a whole life insurance plan yields a large outcome.
At Aflac, we take the guesswork out of your decision. You can find comfort in knowing your premiums are fixed and your payout is guaranteed (subject to limitations and exclusions). To determine how much coverage you may need, try our whole life insurance calculator.
How Whole Life Insurance Works
Your whole life insurance rates are determined by your age, medical history, and coverage goals. These factors allow us to create a plan that suits your needs best. Once decided, the premiums are fixed throughout your plan and the death benefit is certain. Some insurance companies allow you to make payments monthly, quarterly, or biannually.
Next, a portion of your premiums is usually put into an investment account to grow throughout the life of the plan. When the plan ends, the accrued cash value of the plan will be paid out to the beneficiary. If you name your beneficiary as an irrevocable life insurance trust, you may lower the tax liability. You can also broaden the number of beneficiaries on your policy.
At Aflac, you can get a better idea of what your plan will look like by getting a whole life insurance quote. This helps make the process easier and quicker. Our whole life insurance plans are also portable, so you can take them with you to every new venture.
Benefits of Whole Life Insurance
There are specific benefits to having a whole life insurance plan. At Aflac, we offer no-medical exam whole life insurance. Here are a few key reasons to choose this type of permanent coverage:
- Premiums are consistent, unless you want to raise the cash value of your plan.
- The death benefit will be paid to the beneficiary when the coverage ends.
- Your policy builds cash at a constant rate, tax-free in a secure account.
- You do not need to choose a term length – your life insurance coverage lasts your whole life.
- You may be able to access the cash value of your plan before it expires.
Whole Life Insurance Cash Value
There are a handful of whole life insurance tax benefits that make this path appealing. Part of your premiums go into an account that accumulates over time, tax-free—otherwise known as the cash value. One of the main tax advantages of a whole life insurance plan is that your cash value can grow at a faster pace since there aren't any fees being taken out.
You are also able to tap into these savings in an emergency through a loan or partial withdrawal. This can be especially helpful if you withdraw any funds post-retirement because you’ll likely be in a lower tax bracket by then.
This type of plan is popular for those who want to maximize the cash value for loved ones. The beneficiary shouldn’t have to pay any income taxes on the death benefit. We recommend you speak with a tax professional to see how you can lower your tax liability, regardless of the plan you choose.
Life insurance can be an essential part of financial and legacy planning. When shopping around for coverage, you may come across various products that fall into two main categories: term life and permanent life (also commonly referred to as whole life). Understanding the essential differences between these two main types of insurance can help you make coverage decisions according to your needs and goals.
Remember that insurance products for groups, policies that cover a group of people under a single contract (e.g., coverage offered through an employer), can differ from policies sold to individuals. The following information below focuses on products as typically sold to individuals.
What is term life Insurance?
A term life policy is purchased to last for a specified period, such as 1, 5, 10, or sometimes as much as 30 years. Coverage expires when that period ends–hence the name–and therefore, a payout only happens if the insured's death occurs during the specified period. If the insured person outlives the original policy period, coverage renewal may be an option, but the premiums may be higher.
How term life coverage works
A term life policy may be the most simple, straightforward option for life insurance for many people. A death benefit can replace the income you would have earned during a set period, such as until a minor aged dependent grows up. Or, it can pay off a large debt, such as a mortgage, so that a surviving spouse or other heirs won't have to worry about making the payments.
When exploring life insurance options, you may encounter the word "cash value." Term life policies do not build cash value. Your premiums go towards your payout, making costs for policyholders comparatively lower than for permanent life insurance. However, some insurers have created term life products with a "return of premium" feature, returning a portion of the premiums you pay if a claim is not filed before the end of the coverage term. These policies can be more expensive upfront than standard term life insurance.
There are different types of term life, including level term and decreasing term.
- Level term life insurance offers a death benefit that stays the same throughout the policy.
- Decreasing term life insurance reduces potential death benefits over the policy's term, usually in one-year increments.
For more details on the different types of term life insurance, click here.
What is permanent or whole life insurance?
Permanent life, often called whole life insurance or cash value life insurance, provides coverage for the insured person's lifetime as long as premium payments are in good standing. Unlike term life, these policies may build cash value, which a policyholder or their heirs can access under certain conditions. Premiums, as a result, can be higher than for term life policies. Whole life products include several subcategories, including real traditional life, universal life, variable life, and variable-universal life.
How does "cash value" work?
When you pay premiums for permanent life insurance, they go toward the cost of insuring you, your policy fees, and building cash value. In the case of traditional whole life, both the death benefit and the premium are typically designed to stay at the same (level) throughout the policy period. However, the costs to insure you can climb high as you age, especially when you live past age 80.
Charging a premium that increases each year would make life insurance unaffordable for many people in their advanced ages. Instead, the insurance company charges throughout the coverage period a higher premium than needed to pay out claims in the policy's early years. The company invests this money and, as necessary, uses it to supplement the level premium to help defer the cost of insuring older policyholders.
By law, when these "overpayments" reach a certain amount, they must become available to the policyholder as a cash value, accumulating in a savings account. Under certain conditions, the policyholder can withdraw or take out a loan against the accumulated cash value. It's important to remember that cash value is usually restricted as a living benefit, remaining with the insurance company when the insured dies. Any loans against the cash value may reduce the death benefit.
Term life or permanent life: which is right for me?
All permanent or whole life policies typically offer the advantage of coverage during your entire life but can charge higher premiums than term life products. Therefore, your death benefit can be smaller than with term life for the same amount of money. People choosing whole life are likely to prioritize certain features that fit with their individual financial goals, such as the ability to plan for consistent benefits and premiums and the potential for tax-deferred savings growth via the cash value component of their policy.
Click here for more details on whole life/permanent life insurance.