What Is Whole Life Insurance? (And How To Get It) – Forbes Advisor – Technologist

Whole life insurance remains in force for your lifetime as long as you pay your premiums. It also has a cash value component that accrues over time.

Cash Value Accumulation in Whole Life Insurance

Whole life insurance is a type of cash value life insurance. Part of the premium payments for whole life insurance will accumulate in a cash value account, which grows over time and can be accessed with a policy loan, withdrawal or surrender of the policy.

Similar to a 401(k) or IRA, the money in the cash value account grows tax-free. However, if you take out cash value that includes investment gains, that portion will be taxable.

Whole life policies typically have a low guaranteed return rate, and it can take decades for cash value to exceed premium costs.

The accumulation of cash value is the major differentiator between whole life and term life insurance. While actual growth varies by policy, some take decades before the accumulated cash value exceeds the amount of premiums paid. This is because the entire premium does not go to the cash value—only a small portion. The rest goes to paying for the insurance itself and expense charges.

Most whole life policies have a guaranteed return rate at a low percentage, but it’s impossible to know how much your cash value will actually grow. That’s because most insurance companies that sell whole life also offer a “non-guaranteed” return rate of return based on dividends. You can choose to apply your dividends to cash value every year, but you can’t know how much that will amount to over time.

It may take decades for a policyholder’s cash value to exceed what’s paid in premiums.

Using the Cash Value in Whole Life Insurance

You can tap into cash value with a withdrawal or a loan, or by surrendering the policy. If you take a loan, it’s tax-free, and you can pay it back with interest. There are no taxes as long as your withdrawal is less than the portion of your cash value that’s attributable to premiums you’ve paid. If your withdrawal is greater, you’ll owe taxes on the difference because those are investment gains.

Outstanding loans and withdrawals will both reduce the amount of death benefit paid out if you pass away. That’s not necessarily a bad thing. After all, one of the reasons to buy a whole life insurance policy is to get cash value, so why let the money sit there without ever using it?

You want to be sure that you know all the ramifications of accessing cash value before making any decisions.

Death Benefit and Choosing Beneficiaries

When you buy a policy, you’ll choose a life insurance beneficiary to receive the death benefit. You don’t have to split the payout equally among beneficiaries. You can designate each percentage, such as 75% to Mary and 25% to John.

It’s also a good idea to designate one or more contingent beneficiaries. These folks are like your backup plan in case all the primary beneficiaries are deceased when you pass away.

Designating beneficiaries is an important task, as is keeping your designation up to date with your wishes. The life insurance company is contractually obligated to pay the beneficiaries named on the policy, regardless of what your will says. It’s wise to check once a year to verify your beneficiaries still reflect your wishes.

What Happens When You Die

A major selling point of whole life insurance is that it can be in force until your death as long as you’ve paid the required premiums.

But here’s a kicker: For most policies, the policy pays out only the death benefit, no matter how much cash value you’ve accumulated. At your death, the cash value reverts to the insurance company. And remember that outstanding loans and past withdrawals from cash value will reduce the payout to your beneficiaries.

Some policies allow you to purchase a rider that gives your beneficiaries both the death benefit and the accumulated cash value. This provision also means you’ll pay higher annual premiums, as the insurance company is on the hook for a larger payout.