Last Updated on September 17, 2020 by Andrew Lee
One of the biggest decisions you’ll ever make when it comes to buying life insurance is choosing between a term and a whole life policy. They both have the same financially helpful feature of paying out a death benefit, but their similarities end with that. Keep in mind that they have their own sets of benefits and advantages over the other, so make sure that, before you opt for term coverage, the more popular of the two, you first explore what only whole life can give.
Whole Life Basics
As one of the types of permanent life insurance, whole life provides you with life-long protection, unlike term policy that has a specified time of coverage. In other words, once you purchase it and keep paying your premiums, you don’t have to worry about it lapsing. Both the premiums and the death benefit payout also remain the same, according to NerdWallet. So you won’t have to think about surprising increases in your overall insurance expenditures. Arguably the biggest advantage of this type of life insurance though is its cash value component.
If you are a beneficiary, you also need to have a copy of the insured person’s death certificate.
Understanding a Whole Life Insurance Policy’s Cash Value Component
One of the major selling points of whole life insurance is its cash value component, which term coverage doesn’t have, as the Insurance Information Institute reports.
Basically, it acts as a savings account within the plan. Your insurer will take a portion of the premiums you’ll pay towards your coverage and put it into this account. Over time, it will build up a tax-deferred amount. On top of that, since your money is just accumulating, it’s guaranteed to grow bigger with your insurer’s interest payments for it. And the best part of this is that you, as the policyholder, can become the beneficiary.
What can you do with the Accumulated Cash Value?
You can take advantage of the money your whole life insurance savings component has built while you’re still enjoying life. Each insurance company has their own regulations on when you can withdraw money from it or loan against it, but once you have reached this period, you can use what you’ve saved for personal and emergency expenses.
Aside from personal expenditures, you can take out a loan against your policy’s cash value component for paying bills, such as mortgages or rent, your children’s schoolings, and medical costs. You can also withdraw money from this savings account for emergency funds. In addition, you can also use the loan to pay for your premiums, in the event you have trouble making it on time.
Monitor how much you draw though, as it may already consume a huge portion of your policy’s face value.
The key takeaway: Should you go for Whole Life?
Now that you know more about the primary differences between whole and term life insurance, you’ll have an easier time determining which one suits you best. To help you clear things up, even more, consider the following situations:
- Go for a whole life policy if you want to remain insured for as long as you live. With this type of coverage, you can rest assure your family will receive the death benefit even when you live beyond the average life expectancy.
- Whole life coverage is a good addition to your investment portfolio.
- With whole life, you can have an extra source of income once your policy’s cash value component has built up enough funds.
The final decision still rests on your shoulders, but considering all the benefits of whole life coverage, it may be the most ideal insurance policy for you. Just make sure you can afford the premium payments before you get into a contract with any of the insurance companies licensed to operate in your state, be it in Colorado, Nevada, Ohio, or anywhere else in the country.