Whole Life Insurance Explained | Premiums, Cash Value & Benefits
what whole life insurance is, how it works, and why it can protect your family’s future. Learn about premiums, death benefits, and cash value growth in this complete guide.
Meet Nick
I would like you to meet nick nick is not having a good day he drove off a cliff why well i'm sure he did not plan for that he cannot truly plan for everything in life life simply happens that's why whole life insurance was created in the first place fortunately nick had already purchased a whole life insurance policy before getting into the situation he is in right now well fortunate is a strong word considering
The situation so if you're wondering about the true meaning of whole life insurance and want to know more about premiums cash value and death benefit it is crucial to stick around till the end of this video you will be more capable of taking a well-informed decision that can one day determine the future of your family
History of Whole Life Insurance
Since the end of world war ii in the 1960s whole life insurance was the most popular insurance product out there families using whole life insurance policies found financial stability and sufficient retirement funding when losing their loved ones people even used whole life insurance as an investment method at
That time since it would secure annual dividends nonetheless in 1982 the tax equity and fiscal responsibility act otherwise known as tefrop passed in the u.s and it was the biggest tax increase in u.s history this made people turn their attention to stock market which accounted for inflation on an annual basis for instance the s p 500 was adjusted for inflation with an amount of 14.76 in 1982 and 17.27 in 1983.
Unlike the insurance companies which provided rather fluctuating interest rates that did not account for inflation today 59 of people living in the us pay for life insurance it is seen as a contemporary investment tool that is protected from the potential collapse of the stock market we will be discussing this a bit more later in this video and will run the numbers to measure the effectiveness of using whole life insurance as an investment tool
What is Whole Life Insurance?
Now let's address the elephant in the room shall we what is whole life insurance how does it work what happened to nick and his family whole life insurance provides the insured party with some peace of mind when it comes to the continuity of their family's financial stability and overall well-being in exchange for a level regularly paid premium payments it spans over the entire lifetime of the insured party and does not have an expiry date whole life insurance is made of three components these are premiums death benefits and cash value
Premiums
So premiums are what you pay every month for whole life insurance this amount is flat it does not change throughout the lifetime of the insured party in exchange for what is known as the death benefit the death benefit is received by the insurance beneficiaries which are typically the family members of the insured party yes it's called death benefit because the policy beneficiaries receives
This amount when you are dead for instance this can amount to 500 000 or some people even opt in for bigger amounts based on their financial capabilities when premiums paid into your whole life policy matches the death benefit it is considered to have reached its maturity date typically insurance companies design policies to mature when you turn 100 but some recent policies even extend that maturity date to the age of 120
Cash Value
The third main component of the whole life insurance is the cash value which is sometimes referred to as a living benefit part of the premiums you pay goes to building up the cash value which you receive dividends on this is what makes Whole life insurance different from other types of life insurance such as the term life insurance during the first 10 to 20 years of coverage
whole life insurance policy's cash value is quite small due to the fees and costs of coverage the insured party should receive around 10 dividends on the cash value only but when deducting all The insurance companies administrative fees and commissions the insured end up with dividends around 2.2 percent as reported by the consumer reports organization essentially dividends are based on the performance of
The company's financials interest rates investment returns and new policies sold the cash value of your whole life insurance policy will not be taxed while it's growing this is known as tax deferred and it means that your money grows faster because it's not being reduced by taxes each year
Beneficiaries and Access to Cash Value
The insurance beneficiaries in our scenario next family are only entitled to the debt benefit while the cash value may go to the insurance company nonetheless the cash value can be accessed by the insured party which is nick in case of cancelling or surrendering the policy and losing the death benefit many insurance policies feature a withdrawal clause that would allow the insured party to cancel
The policy a check will be given with the amount of the accumulated cash value the policyholders can also take a loan from this cash value without taxation instead of taking it from a bank which is known as infinite banking it is not a loan from the cash value though you're taking a loan from the insurance company and using the cash value you accumulated as collateral that acts as a form of protection for the insurance company the loan amount should be paid back with interest but
The interest rates required by the insurance company would typically be much lower than the interest rates required by bank loans or credit cards unpaid loans will reduce the death benefit by the outstanding amount cash withdrawals are also considered an option to access the built up cash value of the whole life insurance policy but are limited to the amount specified in the terms of the insurance policy when exceeding the set amount these cash withdrawals may end up reducing the death benefit that is received by the policy beneficiaries
Example: Nick’s Policy
So let's illustrate what we learned here through a simple example shall we let's say nick is 40 years old and wanted to purchase a whole life insurance with a death benefit of five hundred thousand dollars on average nick will be paying about four hundred and thirty dollars per month for whole life insurance premiums which results in five thousand one hundred and sixty dollars per year nick will only be receiving dividends on the portion of the five thousand one hundred and sixty dollars
That went into funding the investment component which is the cash value of the policy this will result in 2.2 dividends as reported by the consumer reports organization this means nick will end up with dividends of a bit more than 100 per year so after running some numbers you can quickly see at this point that this is not the most appealing type of investment when compared to other options that may yield a higher return on investment nonetheless whole life insurance is highly recommended by many brokers and financial advisors across the us as the best possible investment tool
The Commission Factor
The reason one simple word commission these advisors receive commissions between 80 to 100 of the annual premium paid by the policy holder this is a high commission since whole life insurance has an investment component and requires rather high premium payments when compared to other life insurance options so in this case nick's advisor could receive up to 5160 dollars
When Whole Life Insurance Makes Sense
But don't get us wrong there are situations that whole life insurance may be an amazing option this includes families that have an ongoing financial need having a child with special needs who requires lifetime support or even owning a sizable business or a state that generates a taxable income by now you should appreciate the fact that whole life insurance is not a one size fits all many companies in the us can provide life insurance policies including prudential financial state farm new york life and more feel free to check our video on the best insurance companies in the u.s
FAQ About Whole Life Insurance
1. What is whole life insurance and how does it work?
Whole life insurance is a type of permanent life insurance that provides lifelong coverage. It combines a death benefit with a cash value component that grows over time on a tax-deferred basis.
2. What are the three main components of whole life insurance?
The three key components are premiums, death benefit, and cash value. Premiums are fixed, the death benefit is paid to beneficiaries, and the cash value grows as a savings element within the policy.
3. How is whole life insurance different from term life insurance?
Term life insurance offers coverage for a specific period, such as 20 or 30 years, while whole life insurance lasts your entire lifetime and includes an investment-like cash value portion.
4. Can you withdraw money from whole life insurance?
Yes, you can withdraw money from the cash value portion of your policy or take out a loan against it. However, withdrawals may reduce the death benefit if not repaid.
5. What happens to the cash value when the insured dies?
Typically, the insurance company keeps the cash value, and only the death benefit is paid to the beneficiaries unless the policy specifies otherwise.
6. Is whole life insurance a good investment?
Whole life insurance can be a stable, long-term financial tool for those seeking guaranteed returns and lifelong coverage, but it generally offers lower returns compared to other investments like stocks or mutual funds.
7. How are dividends from whole life insurance calculated?
Dividends depend on the insurance company’s financial performance, investment returns, and policy sales. On average, policyholders may receive around 2% to 3% annual dividends after deductions.
8. Are whole life insurance premiums tax-deductible?
No, premiums are not tax-deductible. However, the cash value grows tax-deferred, and loans taken against it are usually not taxed unless the policy lapses.
9. Who should consider buying whole life insurance?
Whole life insurance is ideal for people with long-term financial needs, such as families with dependents, individuals with special-needs children, or business owners who want to protect assets and estate value.
10. Which are the best companies for whole life insurance in the US?
Top providers include Prudential Financial, State Farm, and New York Life. These companies offer reliable whole life policies with solid dividend histories and customer satisfaction ratings.
Conclusion
So what do you think would you go for a whole life insurance please let us know in the comments below thank you for sticking around and watching this video i hope that this video gave you a better idea about whole life insurance.