Sure, life insurance has its pros and cons, but there’s nothing more important than ensuring your family is financially secure if you die(We will discuss it in depth here). You might have already heard multiple times about life insurance, but what makes it worth buying over other types of life cover? Let’s take a look at how it works and the benefits of buying a policy.

How Does a Whole Life Policy Work?

Also known by insurers as life assurance, a whole life insurance policy provides permanent cover in the event of your death. Regardless of when you die, your insurer pays out a cash lump sum to your loved ones, supporting them during this difficult time.

Like any type of insurance, once you take out cover, you start paying monthly premiums to your provider. You need to keep up with these monthly payments in order to remain covered.

There Are Two Types of Whole Life Insurance Cover:

• Non-profit whole-of-life insurance – also known as standard cover, you pay a fixed premium each month. The pay-out value of the policy also remains the same throughout your cover.
• With-profit whole-of-life insurance – Your insurer takes the money from your monthly premium, placing it into an investment fund. They then continue to invest your premiums to make a big enough return to cover the eventual payout amount.

There is a risk vs reward element to this type of cover. If the investment performs well, you can receive bonuses which are paid into your policy. However, if it fails, your insurer may raise your premiums to cover the loss.

You can also get joint life insurance – this type of policy covers both you and your partner under a single policy. Many couples opt for joint cover as it can be easier to manage, as well as cheaper than buying separate life insurance policies.

A joint policy typically pays out after the first death in the couple – known as the ‘first death.’ The surviving member is then left with another money to cover the loss of income. There is also a ‘second death’ – this pays out once both policyholders have passed away.

1) Peace of Mind

Whole life insurance is a great way to reassure your family if the worst should happen – especially if you are the main source of income for your household. Thankfully, the pay-out from a whole life policy can reduce the financial burden placed on your loved ones, helping them with payments such as:

• Household bills
• Living costs
• Funeral expenses
• Mortgage repayments
• Outstanding loans/debts

It can also be used to leave a legacy to your children, helping them with future costs. 

2) Lifetime Coverage

A key benefit of whole life insurance is that you are covered for the rest of your life. Of course, this relies on you continuing to pay premiums. This is one of the key differences between whole life cover and term life cover. Unlike whole life, term life policies only cover you for a set period (for example, 20 or 30 years).

The policy pays out, however, only if you pass away within the policy term. If not, the policy expires, and you will no longer be covered or receive any money for the premiums paid previously. Although term life insurance is usually a more affordable option, it does not provide permanent cover as whole life insurance does.

3) Fixed Premiums

 Another benefit of whole-life cover is that your premiums stay fixed throughout the policy. When it comes to life insurance, the older you are, the more you will need to pay for premiums. With this in mind, taking out cover at a young age can ensure you lock-in a cheaper premium rate, saving you money in the long term.

The pay-out value also remains fixed, so your loved ones receive the same amount as when you started the policy. Note that this only applies for non-profit whole life cover, as premiums may be raised for with-profits cover.

4) Building Cash Value Over Time

One of the most attractive features of whole life insurance is its ability to accumulate cash value over time. A portion of each premium payment you make goes towards building this cash value, which grows on a tax-deferred basis. This means you don’t pay taxes on the growth of your cash value until you withdraw it.

The cash value component of whole life insurance can serve several important financial purposes. First and foremost, it provides a source of funds that you can access during your lifetime. This can be particularly valuable in times of financial need or opportunity. For example, you might use the cash value to help fund your children’s education, start a business, or supplement your retirement income.

There are typically three ways to access the cash value of your whole life insurance policy:

1. Withdrawals: You can withdraw a portion of your cash value, although this will reduce your death benefit.
2. Policy loans: You can borrow against your cash value at a relatively low interest rate. These loans don’t have to be repaid, but any outstanding balance will be deducted from the death benefit when you pass away.
3. Surrender: If you no longer need the life insurance coverage, you can surrender the policy and receive the cash value, minus any surrender charges.

It’s important to note that the growth of cash value in a whole life insurance policy is generally slow in the early years but accelerates over time. This makes whole life insurance a long-term financial strategy rather than a short-term savings vehicle.

Flexibility and Living Benefits

While the primary purpose of life insurance is to provide a death benefit, whole life insurance offers flexibility and living benefits that can be advantageous during your lifetime. We’ve already discussed how you can access the cash value through withdrawals or loans, but there are other potential living benefits as well.

Many whole life insurance policies offer riders – additional features that can be added to the policy, often for an extra cost. Some common riders include:

1. Chronic Illness Rider: This allows you to access a portion of your death benefit if you’re diagnosed with a chronic illness.
2. Critical Illness Rider: Similar to the chronic illness rider, this allows early access to the death benefit if you’re diagnosed with a critical illness like cancer or heart disease.
3. Long-Term Care Rider: This rider can help cover the costs of long-term care if you need it in the future.
4. Waiver of Premium Rider: This waives your premium payments if you become disabled and unable to work.

These riders can add significant value to your policy, essentially turning your life insurance into a more comprehensive financial protection tool.

Furthermore, the cash value of a whole life insurance policy can provide financial flexibility in various life situations. For example:

• It can serve as an emergency fund, providing quick access to cash in times of need.
• It can be used as collateral for a loan, potentially allowing you to secure better terms than you might otherwise qualify for.
• It can provide funds for investment opportunities that arise, allowing you to take advantage of financial opportunities without disrupting your other investments.

This flexibility can make whole life insurance a valuable component of a comprehensive financial plan.

How much is whole life insurance?

Whole life insurance is generally more expensive than other types of life insurance. Despite this, it provides permanent cover, so you won’t need to buy additional cover if the policy were to expire like with term life insurance. 

There are a number of factors that can affect the cost of your policy, such as:

• Age
• Health
• Occupation
• Smoker status
• The cover amount of your policy

Life insurance tends to be more expensive for smokers than non-smokers due to the associated health risks it can have. Some insurers may reduce your premiums, providing that you have stayed smoke-free for at least 12 months. So, if you are a smoker and thinking of buying a policy, quitting is one way you can save money on cover.

Thinking of buying whole life insurance? Head online to get a quote and give your loved ones the financial protection they deserve!

Pros and Cons of Whole Life Insurance

Pros	Cons
Lifelong Coverage: Protects your entire life, as long as premiums are paid.	Higher Premiums: Generally more expensive than term life insurance.
Cash Value Accumulation: Builds cash value over time that grows tax-deferred.	Slow Early Growth: Cash value grows slowly in the early years of the policy.
Tax Benefits: Death benefit is typically tax-free for beneficiaries. Cash value grows tax-deferred.	Complexity: More complex than term life insurance, which can make it harder to understand.
Guaranteed Returns: Many policies offer a guaranteed minimum rate of return on the cash value.	Lower Returns: Often provides lower returns compared to other investment vehicles.
Dividend Potential: Some policies pay dividends, which can be used to increase coverage or reduce premiums.	Opportunity Cost: Money paid into premiums could potentially earn more if invested elsewhere.
Fixed Premiums: Premiums generally remain level for life, providing predictability.	Less Flexibility: Changes to the policy can be costly or difficult to make.
Estate Planning Tool: Can be used to provide liquidity for estate taxes or equalize inheritances.	Surrender Charges: Cancelling the policy in the early years can result in significant fees.
Access to Cash Value: Can borrow against or withdraw from the cash value for financial needs.	Reduced Death Benefit: Loans or withdrawals from cash value can reduce the death benefit.
Creditor Protection: In many states, the cash value and death benefit are protected from creditors.	Potential for Policy Lapse: If loans against cash value are not managed properly, the policy could lapse.
Forced Savings: Regular premium payments enforce a savings discipline.	Tied-Up Capital: A significant portion of your money is tied up in the policy.
Living Benefits: Some policies offer riders for chronic illness or long-term care.	Limited Investment Options: Less control over how the cash value is invested compared to other investment vehicles.
Potential Collateral: The cash value can be used as collateral for loans.	Inflation Risk: The fixed death benefit may not keep pace with inflation over time.

Note: The specific pros and cons can vary based on the individual policy and insurance company. Always consult with a financial advisor to understand how whole life insurance fits into your overall financial strategy.

Conclusion

Whole life insurance offers a unique combination of lifelong protection, tax advantages, cash value accumulation, and financial flexibility. These features can make it an attractive option for many people, particularly those looking for a permanent life insurance solution with additional financial benefits.

However, it’s important to note that whole life insurance isn’t the right choice for everyone. The premiums for whole life insurance are generally higher than those for term life insurance, which can make it less affordable for some people. Additionally, the slow early growth of cash value means that it may not be the best short-term savings vehicle.

The decision to purchase whole life insurance should be made as part of a comprehensive financial plan. Consider your long-term financial goals, your need for permanent life insurance coverage, your risk tolerance, and your overall financial situation. It’s often helpful to consult with a financial advisor who can help you understand how whole life insurance might fit into your broader financial strategy.