The Key to Buying Whole Life Insurance

Whole life insurance is the most popular type of permanent life insurance. As long as the policy owner pays the premiums according to the specifics of the contract, he or she is covered permanently. Like all permanent policies, whole life pays a death benefit and has a cash-building feature. Part of the premium is applied to the cost of the insurance and the other part is invested. The key to buying whole life insurance is figuring out how it fits into the policy owner's portfolio. For example, younger people who may not have as much cash to spend each month may opt for a term life product. Older people, who need permanent coverage and want an additional way to invest money, may benefit from a whole life policy.

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The Key Differences Among Whole Life Insurance Policies

Another key to buying a whole life insurance is understanding the differences among the six main policy types. Each has specific benefits that should be considered based on the policyholder's unique financial and insurance needs.

Participating Policy

A participating whole life policy functions similarly to stock ownership in the insurance company. A whole life policy owner "participates" in the earnings of the company. Just as stockholders are paid a dividend, so are whole life policy owners.  The policy owner can choose to take the dividend distribution in cash, apply it to the premium or purchase additional coverage. Life insurance companies are some of the most stable and secure companies today. Because they operate under significantly different capitalization requirements than banks, they are often better able to maintain financial solvency. While life insurance companies are less likely to suspend dividend payments, they are nonetheless not guaranteed. The best future indicator of dividend payment is past dividend payment.

Non-Participating Policy

The owner of a non-participating policy does not participate in the earnings and dividends. The owner still receives all of the other benefits of a whole life policy, such as tax-deferred growth, but is not paid a dividend. If the cost of premiums is of concern to a policy owner, a non-participating whole life policy is less expensive than a participating.

Level Premium Policy

The premiums for a level premium policy remain the same for the length of the policy. The level they are at when the policy starts is the level they are at when the policy ends. However, because this type of policy spreads risk equally over a long period of time, the premiums may seem high in the early years of the policy and low in the later years.

Limited Payment Policy

The limited payment option allows the policyholder to pay the premiums during a limited number of years rather than for life. The insurance company will evaluate the amount of premium that would be paid over the life of the policy and divide that among the number of premiums that will be paid during the limited timeframe. The amount would be the same, but the premiums for a limited payment policy will always be substantially higher because they are paid in a shorter amount of time. This is an excellent option for those who want permanent coverage, but who don't want to continue payments.

Single Premium Policy

A single premium policy is bought with one premium. It's usually a large amount and is often in lieu of an immediate annuity. Single premium policies are an excellent choice for retirement savings, estate planning and as a way to shelter money from an overly litigious society. A single premium policy also has immediate equity, which means the policyholder can borrow against it. He or she can use the money for just about any purpose.

Intermediate Premium Policy

Flexible premiums are the main attraction of intermediate premium policies. The amount of the premium is adjusted each year because it is based on the cost to the insurance company of managing the policy. The company estimates its management expenses and bills the policy owner accordingly. Those who are interested in this type of policy, however, are warned that the volatility of the premium can be significantly higher than all other types of policies. Most insurance companies will guarantee that the premium will not rise above a certain amount, but the amount can still be higher than the policy owner expects.

The Key to Buying Whole Life Insurance for Retirement

Whole life insurance policies are quite often purchased as a way to further accumulate retirement savings. A whole life policy purchased with a single premium is considered by financial advisors to be an alternative to an annuity. The benefits of a whole life policy are tax-deferred growth and the ability to borrow against the equity. A whole life policy can also be surrendered, if necessary. However, this usually results in substantial penalties and fees.

The Key to Purchasing Whole Life Insurance for Estate Planning

One way to protect against the ever-changing rules and regulations regarding federal inheritance taxes is through a whole life policy. The earnings grow tax-deferred while the policy owner is alive and in most cases, the death benefit is not subject to the inheritance tax. Inheritance taxes due on assets such as equities, corporate bonds, Treasuries and property can be paid with the death benefit. It can also be used to pay off a mortgage, property taxes or a lien in order to sell the property after the death of the policy owner.

Whole life policy owners must ensure, however, that the named beneficiary is a person and not the estate. If a person is named as the beneficiary, the death benefit is paid immediately and does not go through probate. If the estate is named, the death benefit becomes part of the estate and is subject to all taxes and fees associated with the estate. A whole life policy can also be used for charitable giving. Many wealthy people now leave a portion of their assets to a charity upon death. Hospitals, universities and colleges and performing arts centers can all benefit from a charitable whole life gift.

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