More than this though, whole life insurance also provides a savings package along with the death benefit. Premium payments on whole life insurance accumulate toward a cash value that the insured party can borrow from or withdraw as a whole after a specified period. This guaranteed cash value can act as an emergency fund. In addition, the reason that whole life insurance plans are considered as investments is that the premiums also earn dividends.
A lot of people shoot down whole life insurance plans for being too costly, eating up a lot of money that could be placed in higher return investments instead. However, what most people fail to consider is that whole life insurance plans, although seemingly more expensive than term life insurance at the beginning, have level premium payments that never change through the course of the policy so that in the end, with inflation being calculated in the picture, it actually turns out to be cheaper.
- It provides security of having an “emergency fund” in the form of the cash value that can be borrowed from or withdrawn, while still earning interest on the remaining cash value.
- Premium payments are locked in at the moment of taking out the policy, so it is best to take out a whole life insurance plan while young when premiums are lower and the value of the premium will only keep depreciating as the years go by.
- The earnings from dividends and interests are non-taxable forms of investment.
- The insured party has the option to cease the policy after a specific period of time and still get a good amount of money from it based on the cash value and dividends combined. Sometimes the total amount is enough to return all the premiums paid through the whole duration of the policy.
- In cases where death does not happen before maturity of the policy, the insured party will be the beneficiary of the face amount so he or she gets to enjoy the benefits of the insurance.
- The cash value in the policy cannot be touched by creditors in the instance of bankruptcy or when being sued for unpaid financial obligations.
- Premium payments could be more costly at the beginning compared to term life insurance.
- Dividend pay-offs are usually not as high as expected or as promised at the beginning of the policy.
- It takes quite a while for the insurance to start paying off, somewhere along the lines of 12 to 20 years.
- It does not give the insured party the flexibility of investing his or her money in other forms that could yield higher returns.
The BottomlineIn the end, the most important question is how much a whole life insurance plan will cost you, particularly as compared to term life insurance.
The answer will vary depending on the same factors that premium payments on term life insurance plans are based. Such factors include the face amount you decide to put on your policy, your age, gender, work, and general lifestyle. As in all insurance premiums, the older you are, the higher the premiums, and the more hazardous your lifestyle is, the more you have to pay in insurance, too.
In general, whole life insurance policies could cost from five times to as much as ten times that of a term life policy for the same person. Of course, this is because a portion of the payments will go to the investment part of the package, which, to re-iterate, should be earning dividends or interest.
For a more specific example, let’s say a 50-year old male non-smoker decides to take out a $250,000 insurance policy for a 20 year term. We estimate that he will have to pay about $50 per month for such term life insurance. But if this same man was to take out a whole life insurance policy for the same amount, he will be paying an average of $250 per month in insurance premium.
A lot of financial advisers will say to skip the whole life insurance and go for the term life insurance instead and invest the remaining $200 in other higher-yielding investments. But in the end, it is all up to you, to what your financial needs and your goals in life are. And the most important thing is that your main goal is really to provide for your family in case of your sudden death, which as we all know, could come at any moment in life.