Whole Life Insurance

Definition of Whole Life

Whole life insurance is considered permanent insurance and provides guaranteed insurance protection for your entire life. There is a “cash value” component that grows tax deferred at a contractually guaranteed rate of interest and the death benefit is a fixed amount.

The premiums are usually level throughout the duration of your policy and the death benefit is guaranteed for lifetime.

With whole life payments, part of your premium is applied toward the insurance portion of your policy, another part of your premium goes toward administrative expenses and the balance of your premium goes toward the investment, or cash, portion of your policy.

Most whole life contracts will allow you to withdraw the accumulated cash value of your policy or borrow against it. Any withdrawal you make will typically be tax free up to your basis in the policy.

Your basis is the amount of premiums you have paid into the policy minus any prior dividends paid or previous withdrawals. Any amounts withdrawn above your basis may be taxed as ordinary income.

As you might expect, given their permanent protection, these policies tend to have more expensive premiums than other types of life insurance products. The cash build up in the policy however, can be used toward premium payments, provided cash is available.

This is known as a participating whole life policy, which combines the benefits of permanent life insurance protection with a savings component, and provides the policy owner some additional payment flexibility.

Some life insurance companies offer whole life policies with limited pay options whereby your premiums stop after a period of typically 15 or 20 years.

This type of insurance has become increasingly popular, providing guaranteed protection for lifetime while only having to pay in for a fixed term. Below are the main characteristics of Whole Life insurance:

  • Level premiums.
  • Builds cash value.
  • More expensive to own.
  • Permanent insurance protection.
  • Loans are permitted against the policy.
  • Favorable tax treatment of policy earnings.

Whole Life Insurance can be a great tool for an Effective Wealth Building Strategy.

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