Whether you’re starting a family or getting married, people usually start to think about life insurance when someone else starts to depend on their ability to earn an income. And that’s great, because that’s exactly what the death benefit is for.
But, as you learn more about life insurance, you’re likely to find that many policies — for instance, whole life insurance — have more than just a death benefit. In fact, while life insurance is primarily about a death benefit for the people who depend on you, it can also become an important part of a financial plan through the benefits life insurance can provide while you’re alive.
What are the benefits of whole life insurance? Here are some of the key things you should know.
Top 4 benefits of a whole life insurance policy
Whole life insurance never expires
One of the most appealing benefits of purchasing a whole life insurance policy is this: As long as you pay your premiums, your death benefit will never expire. It is guaranteed to be paid regardless of when you die, whether that’s tomorrow, in five years, 80 years or even further away.
That’s a key difference between whole life insurance and a term life insurance policy, which will only pay the death benefit if you pass away during the window of time (or term) that your policy covers.
Premiums on whole life policies stay the same
Premiums are the monthly payments that you make to an insurance company to pay for your policy. Whether you have a whole life or another kind of insurance policy, you will be required to pay premiums.
Some types of insurance policies may require you (or allow you) to adjust your premiums over time. But the premiums that you pay for your whole life insurance policy are guaranteed to remain fixed and consistent for as long as you have your policy. Your premium also contributes to your cash value.
RELATED CONTENT: Our Life Insurance Guide can help you learn more about life insurance and how it can benefit your financial plan.
Whole life insurance builds cash value
Cash value is one of the key living benefits of whole life insurance. A portion of every premium payment you make is added to your policy’s cash value, which accumulates slower in the early years of the policy. That becomes money that you can access at any time for any reason.1 Since it’s guaranteed never to go down, it can become an important, stable part of your financial plan.
Whole life policies can earn dividends
In addition to guaranteed cash value growth, many life insurance companies pay dividends.2 While you can take dividends as cash or use them to pay a portion or all of your premium, many people reinvest them in their policies. That can allow your death benefit and cash value to accumulate even more quickly.
What are the tax advantages from whole life insurance?
Life insurance has several key tax advantages. The death benefit is tax-free. Also, you can borrow against your cash value — perhaps to ride out a market downturn in retirement — without paying taxes3 as long as the loans are repaid properly.
Additionally, the cash value growth (in addition to growth through dividends) is tax-deferred — you will only owe tax on the growth if you surrender your policy and take out the money. You can always take the amount you paid in premiums tax-free.
What are the advantages of living benefits of whole life insurance?
As you can see, in addition to its guaranteed death benefit, whole life insurance can become a financial asset that you can use throughout your lifetime. These so-called “living benefits” of whole life insurance — the cash value your policy accumulates — can make a whole life insurance policy one of the most flexible parts of your financial plan.
What is a living benefit rider?
A rider is an added benefit to a life insurance policy that comes with an additional cost. Think of it like upgrading certain features of a new car — perhaps adding a roof rack or leather seats. A living benefit rider typically allows you to access your death benefit early — while you’re still alive — for specific reasons, like a qualified long-term care event. Another example of a rider is something known as a waiver of premium benefit, which lets you keep your policy active if you’re unable to pay your premiums for certain qualified reasons. A financial advisor can explain more about available options you may want to consider.
Find the best life insurance policy for you
Although it may seem like you need to choose between whole or other kinds of life insurance, the truth is that many financial plans typically include a mix of multiple kinds of policies, perhaps term and whole life insurance. This can give you more flexibility to prepare for any of life’s many possibilities. A financial professional can help you find the right mix of insurance and show you how it fits into your overall financial plan.
1Accessing your cash value will reduce your death benefit and may affect other aspects of your plan.
2Dividends are not guaranteed.
3Loans taken against a life insurance policy can have adverse effects if not managed properly. Policy loans and automatic premium loans, including any accrued interest, must be repaid in cash or from policy values upon policy termination or the death of the insured. Repayment of loans from policy values (other than death proceeds) can potentially trigger a significant tax liability and there may be little or no cash value remaining in the policy to pay the tax. If loans equal or exceed the cash value, the policy will terminate if additional cash payments are not made. Policyowners should consult with their tax advisors about the potential impact of their policy loans.