When faced with the wide range of life insurance coverage available, you may wonder what type really fits your needs now and what coverage you should have in place for the future. A good first step is to understand basic whole life insurance coverage.
Whole life insurance provides a benefit in the event of death, and it also has the potential for tax-deferred cash value accumulation. Premium payments first pay the cost of pure insurance coverage, including the expenses and mortality factors of the insurance company. The company then invests the remaining premium dollars to build the cash value of the policy.
A second feature of whole life insurance is the predictability of expense. As long as the insured continues to pay premiums according to the contract, premium amounts will not change and will continue until the policy matures, which is when the cash value of the policy equals the face amount of the policy. The point at which premium payments cease is clearly stated in the policy (typically age 65, 75, 85, or 95). The length of the payment period will, of course, affect the dollar amount of the premium payments.
The guarantee of insurability is a third feature of whole life insurance policies. Once the policy is issued and as long as premium payment responsibilities are met, the insured is guaranteed coverage for life in accordance with the terms of the policy. Evidence of insurability is not required after the policy is issued, as long as the original policy remains in force.
The final feature to consider is the ability to borrow against the cash value of a whole life insurance policy. Funds may be borrowed against the cash value of the policy at any time, depending on the policy. It is important to note that access to cash values through borrowing or partial surrenders can reduce the policy’s cash value and death benefit, can increase the chance that the policy will lapse, and may result in a tax liability if the policy is terminated before the death of the insured. Loan approval must come from the insurer, but it is fairly routine. No repayment schedule is set beyond the regular payment of interest on the loan, with outstanding loan balances deducted from the death benefit in the event of the insured’s death.
Your Personal Life Insurance Needs
Once you have considered the life insurance options available, be sure to evaluate them in relation to your personal needs. If you seek an instant “estate” to provide for loved ones, or wish to cover certain financial obligations in the event of your death, then a whole life policy may be a viable option for you. Note: Whole life insurance policies are subject to fees and charges. Guarantees are based on the claims paying ability of the issuer.
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