There are two main types of life insurance- term life and whole life. Term life insurance is temporary insurance that will last for a certain amount of time, or term. Whole life is permanent insurance that builds cash value.
How does whole life insurance build cash value? Whole life insurance will last for your entire lifetime, as long as you continue to pay your premiums. The fixed premiums are higher than a term life policy and that’s because a portion of your premiums are invested by the carrier. You can look at it as a built in savings element or, as some people refer to it, “forced savings.”As you pay your premiums, your policy will build cash value. This cash value is tax deferred until you decide to withdraw or borrow against it. If you die, your beneficiaries receive the death benefit, which is the face amount of the policy.
If you withdraw your cash value without surrendering the policy, then you are essentially borrowing against your life insurance policy. The carrier will charge you a specified interest rate until the money is returned to the policy. Any money that is owed at the time of the insured’s death is subtracted from the death benefit.
Whole life cash value insurance has advantages and disadvantages. One advantage is that the premiums are level for life. A whole life policy also has the ability to build cash value, tax-deferred. A disadvantage is that it costs much more than term life insurance. You should weigh the pros and cons of whole life insurance for your particular situation. Be sure to speak with an experienced agent to determine which type of life insurance is best for you. Get some free quotes for term life and whole life to compare the difference in cost.
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Whole life is permanent life insurance that builds up cash value and it can also pay dividends. This means that you’ll have life insurance coverage for your entire life, as long as you continue to pay your premiums. Your policy will never be canceled so it is a good choice if you want life insurance coverage for the long-term (longer than a 30 year term policy, for example).
There are two main types of whole life insurance policies- non-participating and participating. The difference between the two is that participating whole life policies pay dividends. These dividends come from successful investments made by the life insurance carrier, as well as favorable mortality rates. You can choose to take your dividends in several ways.
Cash. Your dividends can paid be paid to you in the form of cash and you can use that cash in any way you choose. Life insurance carriers will typically mail these dividend payments to you in the form of a check.
Reduce your premiums. Your dividends can be used to pay a portion or all of your premium payments. For example, if you have a $200 dividend payment that is due to you and your premium payment is $1200 annually, you can choose to have your dividend be paid towards the premium due. So you’ll end up paying $1000 for the difference. In some cases, if the dividends are large enough, it can pay the premium entirely.
Pay off a policy loan. If you have borrowed from your whole life insurance policy, then you can choose to have the dividends be used as payment towards the loan balance or towards the interest due.
Once you decide on how you want your dividends to be paid, you’ll have to contact your life insurance carrier so they can update your policy with the correct mode of payment.
