There are multiple types of life insurance policies available to protect your loved ones when you pass away. Whole life insurance is the most common form of permanent life insurance, which means that if you pay your premiums, you don’t ever have to worry about your coverage expiring.
Another common variety of life insurance is called term life. In a term life insurance policy, the life insurance protection expires whenever the selected term you chose is over. Renewing your term life insurance policy at that later stage in life would almost certainly cost significantly more every month — that being if you could still qualify to get a policy. Get a quote about the cost of a term life policy.
Is whole life a good choice?
Along with the death benefit, there is a second major feature of whole life — you’re building an asset, cash value that builds in your policy tax deferred, and can be used over your lifetime in a tax-advantaged manner1,2,3. The cash value, for example, can play a key role in your retirement and financial planning. See how the Carlsons used their cash value benefit to finance their family’s next steps.
When reviewing which coverage makes sense, consider the six top benefits below offered by the insurance company.
- The cost is guaranteed to stay the same.4 Your premium payments, the amount you pay the insurance company each month, will never go up.5 By remaining level, these premiums may potentially feel much more affordable over the long run. While whole life premium payments in the early years are higher than those for term life, the advantages increase significantly as time passes. For retirement planning, this would mean guaranteed availability of life insurance in your senior years, at a fixed cost.
- Fixed benefit for your beneficiaries. The decisions you make now will set up your future, even when you’re no longer here to provide financially for loved ones. You can depend on a guaranteed amount of money going to your heirs or other designated causes from what is known as a death benefit. This life protection won’t vanish if premiums are paid — it’s a financial product that remains in place for your entire life.
- Tax-advantaged benefits. In addition to the tax-free sum you’ll be leaving to your loved ones, your cash values grow on a tax-deferred basis. You can borrow against the value if you need a loan (pay the money back in, or it will reduce the amount going to your heirs). The tax-free assets you leave to your heirs or causes after you’re gone will be quicker to access than other assets. While property and other aspects of your estate may be impacted by taxes and possibly take time in probate court, life insurance isn’t part of that package.7 The money could also save your heirs or estate from having to cover your funeral expenses.
- Potential dividends. If you buy a whole life insurance policy from a mutual insurance company, you may receive annual dividend payments on your policy.6 These payments, while not guaranteed, are a way mutual companies share with policyholders. Dividends can be reinvested into your policy to help build cash value faster. Another financial planning tactic is to use dividend payments to buy additional insurance and increase the total “death benefit” (the amount of money that will be payable to your loved ones). You can also let the dividends pay some of your premiums. Lastly, you could have the dividends paid to you in cash.
- Retirement funding. A whole life insurance policy can be used effectively to build supplemental retirement income. If you’ve had the policy for enough time to build up your cash value, you can use that money in a tax-advantaged manner as part of your retirement’s financial mix. Unlike retirement savings accounts, the cash value is insulated by fluctuations of the market and the money may be tax-free when you start withdrawing it. While that could impact the amount of money you’d be leaving to your beneficiaries, it is another guaranteed asset you could plan and rely upon.8
- Giving money to a charity or non-profit. If you want to help your favorite causes, you can use your insurance policy in several ways. Charitable giving can also provide income tax benefits now, while you’re alive. A charitable donation may entitle you to an income tax deduction — often beneficial in cases when you’ve had a high earning year. In addition, you can leave the money accumulated in the account to the non-profit after you’re gone. Note that tax laws change so it makes sense to consult with a tax advisor.
Pick a reliable insurance company
Choose an insurance company with an extensive track record of success so that it’ll be there your entire life — and long into the future — when thinking about what you’ll leave to beneficiaries. Making financial plans in this strategic way protects what you have now while building cash value resources for the future, no matter what life throws at you.
If you think whole life could play a part in your financial future, talk to a financial professional — one who understands and explains all the options for you and your family.
This kind of guaranteed coverage allows you to financially safeguard your loved ones, leave them money, and set up a stable, tax-sensible retirement asset.