Have you been thinking lately about what would happen to your family if you were to die?
No, it’s not anyone’s favorite topic of discussion, but looking into your options now could end up benefiting you greatly in later years.
Hardly any Americans feel like they have adequate coverage should something happen to the primary earner in their household. In fact, 3 in 10 households have no life insurance whatsoever.
There are term life insurance plans and whole life insurance plans. Today, we’re going to talk about the benefits of whole life insurance plans, but it’s beneficial if you know the basic differences between the two.
Term and Whole Life Insurance
Term Life Insurance
Term life insurance protects you during a given term of time. That usually means 10, 20, or 30 years, and it’s up to you to choose when you get the policy. If you die during that period of time, your family will get the payout from the insurance. Otherwise, there’s not much of a benefit.
These policies tend to have cheaper premiums than whole life insurance plans, but as we’ll see, there are reasons for the difference in cost.
The idea is that once the term is over, your family won’t need it if something has happened to you. Let’s say you choose a 30-year policy when you have your first child. At the end of it, your kid will be grown and independent and you’ll potentially have your mortgage and other large expenses paid off.
But if you were to die during the 30-year period, your family would be guaranteed a payout.
In a nutshell, that’s term life insurance.
Whole Life Insurance
Whole life insurance plans, on the other hand, never expire. As long as you keep paying your premium, the value in the plan continues to grow and your beneficiaries are guaranteed payment no matter when you die. There is no limit to the length of the plan.
So in the previous example, if the person had bought whole life insurance, it wouldn’t matter whether they died in the 30-year period or lived another 50 years. The life insurance would still pay out to their family.
That’s why whole life insurance plans are significantly more expensive than term life insurance plans. But whole life insurance offers some unique perks that make it more attractive in some cases.
So let’s take a closer look at whole life insurance now that we know the difference. What are the benefits, and why would someone choose whole life insurance?
The Benefits of Whole Life Insurance Plans
They’re for Life
Like we just mentioned, one of the primary benefits of these plans is that they don’t expire. If you buy a plan you can keep it for decades as it increases in its worth.
Another benefit to these plans is that the premiums don’t increase. The price you initially begin paying is what you’ll pay until you die. That’s important because if you buy the plan while you’re relatively young and healthy, you’ll keep that same premium even if you are hit with health problems down the road.
As anyone can tell you, it’s much more expensive and difficult to buy life insurance if you already have serious health issues. Having guaranteed insurance throughout your life is not something to take lightly.
A plan that you bought while you were young and healthy could end up being one of the best investments you make.
Another benefit to whole life insurance plans is that they are not tied to the market as with mutual funds, 401k’s, and other long-term investments that some people choose. Instead, they grow steadily based on the interest rate.
At times, that can be fairly low, but other years it will be much higher. The point is that you’re guaranteed compounding growth. That’s important to many people who are looking at a long-term strategy for growing and passing on wealth to their loved ones.
A slow and steady growth rate isn’t always the most exciting, but you can rest easy knowing that a crash in the market won’t lose you money. And there will be another crash in the market. The stock market works in a cycle that overall trends upward, but there are always down times, as well.
Some people decide on mutual funds and other low-risk options, but they don’t have all of the perks that come with whole life insurance plans.
Some whole life insurance plans may even pay out dividends each year. That’s money paid off the insurer’s profits, and those dividends are not taxable. That’s an additional tax-free source of income that you could be making off your insurance policy.
You’ll also be able to withdraw money from the policy without penalty. This is a big deal, as anyone who is putting money in a retirement plan can attest to. Most people will get hit with penalties for withdrawing their money early.
Of course, any death benefit will be decreased if there is an outstanding loan balance, but having that source of cash can be beneficial for dealing with certain expenses as they come up.
You can also borrow against the cash value in your policy, or use it as collateral for a third-party loan, making it doubly useful.
Now it’s time to think about the money that you’ll be leaving to your family.
The payout from whole life insurance plans is tax-free. If you are wealthy enough, you may run into the estate tax, but even so, you’ll be leaving a large amount of money to your family tax-free.
In fact, the money you leave in your whole life insurance plan can be used to help pay the estate tax if you’re leaving behind lots of property to the next generation. Without the cash payout from your life insurance, your heirs might be forced to sell property and other valuables to pay the estate tax.
That’s probably not what you have in mind for after you pass away, and a whole life insurance policy can help ensure that this doesn’t happen to your progeny.
Many families use life insurance as a way to grow and protect their wealth over generations, and with some planning, it can be a smart way to make sure your hard work is paid forward in full to your children.
Who Should Buy Whole Life Insurance Plans?
So let’s think about who whole life insurance might be best for. As we mentioned before, anyone planning on leaving a large estate would be wise to look at whole life insurance plans.
Also, if you’re thinking about spending all of your retirement savings while you’re alive, but want something to pass on to your children, or at least pay for funeral expenses, then a whole life insurance policy could be just what you need.
They’re guaranteed a payout no matter when you die, so there’s no need to worry about outliving your policy.
You may also want to think about using a whole life insurance policy to keep inheritances even. If you own a business and are leaving it to one child, leaving the life insurance policy to other children can help even things out.
Another reason to look into whole life insurance is if you have a life-long dependent. A child with special needs may require lots of intensive care that you’ll no longer be around to provide.
Whole life insurance plans can help ensure that there will be money left to take care of your dependent once you’ve died. In this case, you should speak with an attorney and a financial advisor about setting up a trust in their name.
When to Buy Whole Life Insurance
Remember, the longer you wait, the more expensive getting a policy will be. Whole life insurance plans may be pricey, but if you act early enough, you can get a relatively inexpensive premium. Which, as we mentioned earlier, won’t change as you get older.
The vast majority of life insurance is held by people 45 or older, but by that point, you’re already looking at steep increases in the premium you pay. It’s tricky because the younger people are, the less likely they are to have the money for a premium.
Still, by looking carefully at your finances, you may be able to find places where you’re spending too much, or you feel justified in sacrificing in order to provide for your family down the road.
The difference in your yearly contribution if you buy at 50 rather than at 30 might be as much as $10,000.
So if you have the money and want to explore your options for growing that wealth and passing it on to your children, then you may want to start looking into different whole life insurance plans.
Finding the right whole life insurance plan for you can be difficult on your own, but getting a great quote doesn’t have to be that hard. Give us a call at Real Life Alliance and we can get you started on one of the best investments you’ll ever make.