Whole life insurance is one aspect of permanent life insurance. ‘Whole life’ is derived from its duration until the death of the insured once it remains in force. In most cases, a whole life policy would mature at age 100. The other important characteristic of whole life policies is their cash-value status. Like anything else, whole life plans have merits and demerits.
The merits of whole life plans are:
1) Forced savings
Since whole life plans bear cash values, they would enable people to accumulate wealth while having permanent life cover. Insurers use part of the premium for investment and this benefit is transferred to the policy owner.
2) Automatic Premium Loans
Non-payment of renewal premiums may cause temporary insurance to lapse easily. Whole life plans offer a non-forfeiture option that deducts the unpaid premium from the policy’s cash value. This can be treated strictly as a policy loan or withdrawal at the insurer’s discretion.
3) Paid-up additional insurance option
This is available with dividend-paying whole-life insurance. Dividends are used to purchase additional permanent insurance. This would increase the cash value accumulation as well as the death benefit.
4) Policy withdrawals
You can either borrow or withdraw from whole life insurance. In cases where the loan is interest-free, the net cash value can be treated as a reserve or emergency fund.
5) Use in estate planning
The permanence of whole life insurance enables estate planning. Since insurers are almost guaranteed to pay a death benefit, whole life insurance can create and help maintain your estate.
6) Reduced paid-up permanent insurance provision
This is another non-forfeiture option that uses the cash-value as a single premium to purchase a reduced amount of permanent insurance. When you are unable to continue paying premiums, this option is available.
Disadvantages of whole life insurance include:
1) Bundled premiums
Unlike universal life plans, it is difficult to discern how whole life premiums are allocated. It is therefore difficult to monitor the performance of your whole-life plan. The portion of the premium that insurers use for investment declines as the policy duration advances. However, the percentage of the premium invested is unknown to the policy owner.
2) Staggered cash values
Whole life plans only accrue cash values after two to three years generally. This means that the cash value would seldom exceed the accumulated premiums paid and makes the whole life plan less attractive.
3) Policy loans with interest repayment
Policy loans may be convenient. However, if you are required to repay this with interest, you are effectively borrowing your own money. Repayment of policy loans is not always required. It is a major disadvantage to the policy owner when the terms of repayment are enforced.
Whole life plans are more expensive than universal life insurance and far less cost-effective than term insurance.
5) Variability of returns
This applies to variable whole life plans, where the policy owner bears the risk and cash-value accumulation may fluctuate.
6) Reduced flexibility
This applies to both the investment portfolio and the death benefit. Whole life plans do not usually have adjustable premiums or allow alterations to the life cover. This lower flexibility reduces the policy owner’s options. There are generally fewer optional supplementary benefits assigned to whole life insurance as well.
Whole life plans may seem dated compared to universal life insurance and too expensive when compared to term insurance. It seems as if there is room for certain types of whole-life plans. However, the majority of whole-life plans bear more ‘cons’ than ‘pros’. They offer the demerits of cash value plans and less flexibility when compared to other forms of permanent insurance.