PROS AND CONS OF WHOLE LIFE INSURANCE

The main advantage of whole life insurance is the ability to accumulate a cash value on a tax-deferred basis. This cash value also contributes to the total value of an estate when the policy is owned by the insured. You can borrow against this cash value, if needed; plus, if you no longer need any type of insurance protection, you can cancel your policy and the cash value will be returned to you.

Another advantage is that the coverage is for the insured’s entire life, unless the policy is canceled. As compared with term, the coverage from a whole life policy is designed to last for as long as the insured is either alive, or wants it. Term policies expire after a specific amount of time. Of course, term policies can be renewed, but the cost of the premium will increase. Conversely, the premiums of a whole life policy remain level as long as the policy is in force.

Because of the savings feature, many people have said that they are forced to save because of the premium payments. Additionally, policyholders can budget their premiums over a longer period of time (with the exception of single-payment policies), thus eliminating the potential risks of coverage not being affordable. This also reduces the chance that people who need coverage will be without it.

However, whole life policies aren’t without their drawbacks, too. Although term policies need to be renewed, and there is an added cost at every renewal as compared with whole life policies, term policies purchase more coverage for the amount of premium paid. This is because of the very nature of term insurance, but could be a contributing factor to the fact that term policies are popular.

Interestingly, the cash value also poses a disadvantage to the policies. But that is more due to the misuse of the policy than for any other reason. Whole life insurance policies shouldn’t be used in place of other investments, especially when the other investments can earn the investor a potentially larger return. As a general rule, the interest rate for the cash values of whole life policies is rather small and not competitive with other types of interest rates. Although it’s guaranteed, investing your money in the stock market may mean a great deal when it comes to overall return. Assuming no need for insurance, how would you feel if you made a 6 percent return on your money in a policy’s cash value, instead of a 11-percent return in the stock market? Would you be happy? I certainly wouldn’t be. This isn’t to say that you should invest your money in the stock market instead of purchasing an insurance policy. What I am saying is that if you don’t need the insurance, don’t buy it. The accumulation of the cash value won’t be significant, and you’ll be paying for insurance you don’t need.

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