Whole Life Insurance

Whole life insurance (also called “permanent life insurance”) provides coverage for an individual’s entire lifetime.  The policy does not have to be “renewed” at some point in the future.  Once established, the policy cannot be cancelled as long as the premiums are paid.  Premiums for whole life insurance are fixed for the life of the policy.  They do not increase as you age.  In addition, a whole life policy contains a “built-in” savings account.  A certain portion of the premium paid for whole life insurance is placed into a “cash balance” account that earns a guaranteed interest rate.  As this account grows over time, the policy owner can use it in a number of ways.  He can borrow against the balance, use the funds to pay the policy’s premiums, or use the funds to purchase additional insurance.  The owner can also “surrender” or “cash-in” the policy, in which case the insurance company cancels the policy and pays the policy owner the balance that has accumulated in the cash account.   In this way, whole life insurance serves a dual purpose.  It functions as both life insurance and as a financial investment.

You may also hear the terms “universal life” and “variable universal life” in discussions of permanent life insurance.  These are variants on the traditional whole life policy.  Their basic structure is the same, but they offer enhanced flexibility and additional investment options.  For example, under a variable universal life policy, you can invest a portion of your cash balance account in stocks and mutual funds.

Whole life is the “traditional” form of life insurance.  It is recommended for those who can afford the higher premiums, want a fixed premium, or want the security of lifetime coverage.  It is good for those who are not disciplined savers, because it forces you to save, and at the same time provides an important safety net for your family.

There is often a lively debate regarding which form of life insurance—term or whole life—is the “better” choice.  In fact, each form of insurance has its advantages and disadvantages.  The right choice depends on your individual circumstances.  In all likelihood, you won’t regret your decision one way or the other.  What you will regret is not getting any insurance at all, or not getting it at a young age when it’s much easier and cheaper to obtain.  So don’t let yourself be distracted by the options.  Talk with a professional as soon as possible, and let them help you decide which form of life insurance is best for you.