What is whole life insurance?
Whole life insurance is a type of life insurance policy that provides coverage for the entirety of your life as long as you pay the premiums. This is different from term life insurance, which usually only lasts for a set period of time, usually between 10 and 30 years. Permanent policies pay out a death benefit to your beneficiaries after your death. Death benefits on whole life insurance policies vary greatly, from as little as $10,000 to over $1 million, depending on your needs and the amount you qualify for and choose.
Whole life insurance living benefits
In addition to a policy’s death benefit, it is often possible, depending on your insurer, to add living benefits to your policy as riders. A living benefit rider is an optional added provision that gives your policy more functionality while you are still alive. Here are some of the most common living benefit riders available to policyholders:
- Accelerated death benefit: Also referred to as a terminal illness benefit, this popular rider allows you to use your death benefits if you are diagnosed with a terminal illness. This may allow you to pay for medical bills or handle other financial challenges. As is generally true for all living benefits, the amount you pull from your policy decreases the amount of the death benefit available to your beneficiaries.
- Chronic illness rider: This rider allows you to access your policy’s death benefits if you are diagnosed with a chronic illness, such as Alzheimer’s disease, that reduces your ability to function in daily life. You will need a doctor to certify that you are unable to complete at least a few of the activities of daily living (ADLs).
- Critical illness rider: Similar to a chronic illness rider, you may be able to access some or all of your death benefit if you have a critical illness. Common illnesses that insurers will consider include heart attacks, strokes and cancer. Your doctor will need to certify your medical condition.
- Long-term care rider: If you need home care or move to an assisted living facility, this rider allows you to use your policy’s death benefit to pay for your care. It comes in two varieties: a reimbursement rider, which helps pay the cost of your long-term care expenses each month, or an indemnity rider, which offers a predetermined amount of money that is paid to you monthly, regardless of your long-term health care costs.
- Disability income rider: This rider may be useful if you become disabled and lose your ability to earn a living. The income from the rider may last for years or even longer, depending on the provisions of your policy.
- Waiver of premium rider: There are two types of waiver riders: a disability premium waiver and an unemployment premium waiver. With the disability rider, the insurer waives your need to pay your life insurance policy’s monthly premiums if you are disabled or lose your income due to illness or injury. With the unemployment rider, your premiums are waived if you involuntarily lose your job and have qualified for government unemployment benefits.
Whole life insurance cash value
Cash value is a feature found in permanent life insurance policies. Your premium payments are split by your insurer: some go toward paying for the policy’s death benefit, but another portion is reserved in a cash value account that accrues interest over time.
Once your account has built up its cash value, you may be able to borrow against it with an interest-bearing loan. You are not required to pay back this loan while you’re alive, but if you don’t, the owed amount is ultimately first taken from the policy’s death benefit before the insurer makes a payment to your beneficiaries. This cash value makes whole life and other permanent forms of life insurance appealing to those who wish for financial benefits from their policy while they are still alive.
The cash value of your account will continue to build for as long as you pay your premiums, but this amount is not added to the death benefit that is available to your beneficiaries after your death. Instead, it reverts back to your insurer.
Whole life insurance dividends
For individuals who are looking at whole life insurance as part of a strategic financial plan, policies that pay dividends may be appealing. These are offered by many carriers but are not guaranteed. To put it simply, if the insurance company has a good year financially, they will share some of their surplus earnings with their policyholders.
Whole life insurance policies can be divided into two types: participating and non-participating. It is the participating policies that are eligible for dividends. These are often offered through mutual life insurance companies, such as MassMutual, which has consistently paid out dividends since the 1800s.
If you earn dividends, this money is not restricted, and its size is determined by how much the policy has contributed to the company’s surplus. The dividend can be used to reduce your premium rate, add to the cash value or purchase additional life insurance. It can also be received as a check to be used however the policyholder would like.
