Whole life insurance is a type of permanent life insurance, which stays in effect for as long as you pay the premiums. This means you never have to worry about uninsurability or losing your safety net as you get older.
Whole life is more complicated than term overall, but one definition you need to know is the cash value, which is an investment-like product coupled with the insurance policy.Your premium payments are split between the death benefit and cash value. Over time, the death benefit shrinks and the cash value component grows until the policy consists entirely of the cash value.
With a cash value you can do any of the following:
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- taking out a loan
- draw from cash value
- funding a policy
An attractive benefit of Whole life is that it combines insurance and investing; while most people have separate insurance and investment products. But if you have your insurance and investment bundled together, it works as a forced savings vehicle to help you save. Your whole life policy may also pay out dividends similar to a traditional investing vehicle.
The cash value also works well for people who have complicated financial situations. It’s often used to cover the estate tax, so your full inheritance goes to your beneficiaries.But all of this comes at a price. As mentioned, whole life insurance is much more expensive than term, sometimes as much as six to 10 times the cost. Many people don’t buy enough coverage or end up dropping the policy a few years in because they can’t afford it.