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Sigma Financial Group
Whole Life

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What Is Whole Life Insurance?
Whole life is a type of life insurance contract that provides insurance coverage of the contract holder for his or her entire life. Upon the inevitable death of the contract holder, the insurance payout is made to the contract's beneficiaries. These policies also include a savings component, which accumulates a cash value. This cash value is one of the key elements of whole life insurance.
Similarities & Differences to Term Life Insurance
  • Just like term life insurance, beneficiaries exist in a whole life insurance policy. They receive the death benefit upon the contract holder's death.
  • The most obvious difference, at least superficially, is cost. In some cases, whole life insurance premiums are three to five times as much as term life premiums, at least at the onset. However, term life insurance lasts a 'term': a specified period, usually 10 or 20 years, before the policy expires. The younger you are and the better health you are in, the lower the cost. When the term is up, you can renew the policy, generally at a much higher premium, and depending on your age and health. Whole life insurance premiums, while higher initially, never go up; this is key. The policy is structured to last your entire life, and as long as you keep paying the premiums, the policy will be in force regardless of age and health.
  • The premiums in whole life policies go towards a cash value as well as a death benefit term life has just a death benefit.
Are the Higher Premiums Worth the Cost?
  • Are the higher premiums worth the cost? In a word, yes.
  • The first key advantage of whole life insurance is that the cost of the premiums paid to the policy never increases, as long as you make sure to pay the premiums and the policy doesn't lapse. The reason why this is important is because with term policies, your rates rise over time. This is due to the changes in your health and age. As you get older, your chances of dying increase. Since the life insurance company takes on that risk, they increase the cost of premiums.
  • With whole life insurance, the premium cost stays the same as long as the policy is in force. Even if you become gravely ill, the cost never changes. It's guaranteed as long as you pay your premiums. In fact, as the years go by, the policy actually gets cheaper. This is because of inflation, which erodes the value of money. By having a premium that never changes, you are essentially paying for the policy with cheaper dollars.
  • The cost of term life polices, on the other hand, is only guaranteed until the end of the term usually 5, 10, or 20 years. After this point, term policy premiums can be raised based not just on your age and health, but also on the rise in inflation.
Cash Value
  • In whole life policies, the premiums paid go toward increasing the cash value and, if you are willing to pay more, increasing the death benefit. Further, your cash value earns interest similar to a savings account.
  • Your cash value and death benefit can never decrease in value unless you start withdrawing the cash value from the policy, or unless you stop paying your premiums. In this way, your whole life policy is akin to a savings account: When you pay your premium, part of the money goes toward the insurance costs, while the rest goes towards increasing your cash value. This cash value earns interest, which is guaranteed by the insurance company, as is the death benefit. The guarantee is as strong as the company that holds your policy, so financial stability is a key element in choosing an insurance company.
Tax Advantages
  • When you put money into your 401K or traditional IRA, you are only deferring taxes, as you pay taxes on all of the money when you withdraw it during retirement. With a whole life insurance policy, you pay the premiums with after-tax dollars. The cash value grows without taxation. You would only be taxed if your withdrawals from the policy exceed what you put into it, and you have the ability to remove gains tax-free by taking a loan off the policy.
Dividends
  • The whole life policy pays a dividend. The key thing here, again, is that these dividends aren't taxed, but are considered returns of premium. So, if at the end of the year the insurance company pays out $1,000 in dividends on your policy, you don't pay taxes on that money. You can take that money in the form of a check, reinvest it in the cash value of the policy, or use the dollars to purchase additional, paid-up insurance. Those dollars will buy more life insurance, provide a bigger death benefit, and earn interest.
Borrowing Against Your Policy
  • It is possible to borrow against the cash value of your whole life insurance policy. For example, if you ever find that you are in need of cash, perhaps to help pay for a child's education, you can borrow money from the cash value of the policy. You do pay interest to the insurance company on this loan, but the loan rates are very competitive with regular bank rates on home equity lines. In most cases, the loan balance can be repaid at the time of death by deducting it from the death benefit.
  • Also, there's the potential for tax-free income. By borrowing against the policy, you can take money out of the policy tax-free. Though you will pay interest on the loan, depending on your income tax bracket, it can be substantially lower than what you'd pay in taxes. This also allows individuals younger than 59 1/2 to access income for an early retirement without having to pay hefty taxes and penalties.
  • Lastly, and particularly appealing to the very wealthy, is the fact that in some states, all or most of the money in a whole life policy is exempt from creditors. In these states, if you are ever sued, that money is viewed as protected because it is intended to benefit someone else: the beneficiary.
Click here:
I would like more information about Whole Life Insurance.
PREVIOUS: Learn about
Life Insurance.
NEXT: Learn about
Universal Life Insurance.

Sigma Financial Group  

Sigma Financial Group
1110 Pivot Rock Road
Eureka Springs, Arkansas 72632

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