There are some insurance plans that you should avoid more often than not. Fortunately, many others can be a good financial tool, once they are used correctly. Whole life is one type of permanent insurance that can be useful in certain circumstances.
Determining if you need a whole life policy can be perceived as two-fold. In the first instance, you have to establish that you need permanent life insurance in the first place. Then you have to justify selecting a Whole Life policy over a Universal Life policy.
A Whole Life policy is just a form of permanent insurance that typically accrues a cash value a few years after the policy’s inception. Whole Life policies were introduced as an alternative to term insurance plans. The major attraction was cash-value life insurance with a “living benefit”.
The concept of the Whole Life plan is vilified in some quarters as a total waste of money. Even in the insurance industry, there exists the belief that Whole Life plans are obsolete. Determining if you need a Whole Life plan should be undertaken systematically. First, you should determine whether you need permanent insurance or temporary insurance. Then you should consider other factors like premiums, opportunity cost and returns desired.
How long do you need the coverage for?
The nature of your life insurance needs is a primary component of plan selection. Whole Life plans typically provide coverage up to age 100. Those who have insurance needs that will exist than 20 years, should consider purchasing a permanent life insurance plan.
The coverage period is often determined by the purpose of the coverage. For instance, life insurance as part of estate planning requires permanent insurance. Sometimes, both short-term and long-term needs constitute total insurance coverage. Generally, you should use permanent life insurance for long-term insurance needs.
What premium level can you afford?
Whole Life plans are more expensive than temporary insurance coverage because of the cash values or dividends attached and the longer coverage period. Even Universal Life coverage may have slightly lower premiums than their permanent insurance counterparts. If the coverage that you require costs more than five percent of your monthly income with WL, then you may have to look at temporary insurance or cheaper permanent insurance plans as options.
Are the optional supplementary benefits that you need available with Whole Life?
Universal Life plans typically offer more additional benefits than Whole Life plans. However, Whole Life insurance also has the same advantage over term insurance plans. If you need more additional benefits than term insurance provides, but fewer than Universal Life plans, Whole Life insurance may be for you.
Returns
Whole Life plans offer payment options in the form of cash or dividends. They may bear accrued cash value without dividends as well. Arguably, the best for of Whole Life insurance is the dividend-paying plan with a “paid-up additional insurance” option. This option offers dividends based on the insurance amount as well, ensuring that returns are increasingly greater as the years go by. If dividends and forced savings appeal to you, then Whole Life can come out on top.
The decision to purchase a Whole Life policy is a particularly tough one. Whole Life plans face stiff competition from all temporary life insurance plans. Even when permanent life insurance is the option, the Whole Life concept has to be compared to Universal Life concept. Universal Life plans are generally better and more flexible. In any event, a good Whole Life plan can still benefit those who need and desire it most.